Shadow RBA behind the curve

Here’s the latest from the Shadow RBA which continues to sorely disappoint in the scope of it operations:

The Australian economy remains in limbo. While non-mining businesses appear to strengthen and the labour market is holding up, consumer confidence has taken a hit after the Coalition government’s first budget a fortnight ago. Furthermore, revisions to US and Chinese GDP growth are giving cause for concern. The CAMA RBA Shadow Board overwhelmingly believes that the cash rate ought to remain steady at 2.5%; it is attaching a 74% probability that this is the appropriate setting. The probability attached to a required rate cut equals 6%, unchanged from last month, while the probability of a required rate hike has fallen slightly to 20%.

The unemployment rate is stuck at 5.8%, with only minimal movements in full time employment fell, the participation rate and monthly job vacancies.

There is no new information about inflation until the release of second quarter inflation measures. The Australian dollar, currently experiencing lower than average volatility, is hovering near the 93 US cent mark. Asset markets, housing and stocks, remain buoyant.

The global economy does not present a clear picture. Recent revisions to US first quarter GDP growth reveal that the world’s largest economy shrank by a whole percentage point, considerably more than expected. Policy makers and analysts are quick to point out that this was due to the severe winter but it may offer the Federal Reserve additional wriggle room to extend its asset purchasing program. There has been no news out of China to hint at an acceleration of its economy; credit conditions and the fragile real estate market there remain a concern.

The biggest change in statistics is the sharp drop in consumer confidence, measured by the WESTPAC consumer sentiment index, following this month’s budget. While the budget’s overall stance was not as contractionary as feared, the public and many analysts considered it to be overly regressive. The index fell to 92.9, down nearly seven points from April. This fall may turn out to be temporary as the disapproval of the budget subsides. However, it actually continues a downward trend, after the index hit a high of 110.63 in September 2013. As a leading indicator, this is a number to watch closely in the coming months.

The consensus to keep the cash rate at its current level of 2.5% has strengthened slightly. The Shadow Board’s confidence in keeping the cash rate steady equals 76% (74% in May 2014). The probability attached to a required rate cut remains steady at 6% while the probability of a required rate hike has slipped to 18% (20% in May).

The probabilities at longer horizons are as follows: 6 months out, the probability that the cash rate should remain at 2.5% rose to 46% (39% in May). The estimated need for an interest rate increase is 40%, down eight percentage points from May, while the need for a decrease has edged down two percentage points to 14%. A year out, the Shadow Board members’ confidence in a required cash rate increase is unchanged at 59%, the need for a decrease fell to 13% (down from 18% in May), while the probability for a rate hold has increased to 28% (up from 23% in May).

Send that one direct to “file 13”. The need for, and likelihood of, a cash rate cut six months out is not lower this month than last unless you’re not paying attention.