Through this year a coterie of glass-half full economists has been calling the bottom of the interest rate cycle. They’ve been wrong of course and throughout interest rates markets have clearly signaled as much, never quite giving in to the bulls. Below is the 12 month interest rate forecast from Credit Suisse:
On a couple of occasions, in March and June, this market has come close to forecasting no more cuts for the year ahead (circled). Of course it’s been wrong both times but did, at least, remain below the zero line.
But today it is different. The serial bottom callers now have some support in this index. In the last few days, for the first time in years it is signaling rate hikes within twelve months (arrow).
Do I agree that this is the likely outcome? No. Why that is the case is captured nicely in a brief quote from Tim Toohey at Goldman Sachs when discussing yesterday’s National Accounts:
It is likely that non-residential construction growth has peaked, after contracting 5.7% in 1H13. Annual growth is now just 1.6% yoy. We expect non-residential construction to continue to decline on a sequential basis and to be 15% below current levels by mid-14.
That is quite some fall and it is only the first in a series of similar steps down in capex. Simply put, there is not enough momentum elsewhere in the economy to offset these falls and that’s before further expected falls in the terms of trade will pressure incomes as well.
I can’t see the RBA finding the bottom for some time to come.
