RBA minutes bubble talk drives dollar gains

Meeting-minutes-picture

The theme de jour is leadership ineptitude. Follow Christopher Kent’s dreadful speech and Joe Hockey’s appalling cheer-leading comes the RBA minutes which have ramped concern about property but haven’t ramped thoughts about macroprudential leading markets to bid up the dollar 20 pips:

International Economic Conditions

Members began their discussion by noting that the pace of growth of Australia’s major trading partners had continued to be around its long-run average over the past year.

Recent data for China were consistent with GDP growth at around the authorities’ target of 7.5 per cent. The growth rates of industrial production and retail sales had remained fairly steady, while the growth of fixed asset investment had declined a little further. The manufacturing PMI for August had declined to around the average level of recent years. Conditions in the Chinese residential property market continued to weaken and members observed that these developments – and their potential to spill over to broader activity and the financial system – remained a risk to the outlook for China. They noted that there was scope for further adjustments to policy settings by the authorities if needed, as well as the potential for tension between the objectives of maintaining economic growth at close to its current pace and placing growth in financing on a more sustainable footing.

The modest easing of growth of Australia’s trading partners in the June quarter had largely reflected the contraction of output in Japan, which had been expected following the consumption tax increase in April. Members noted that more timely measures of conditions had generally picked up a little, but it was too early to judge the likely pace of growth over the second half of this year. The economies of east Asia overall had been growing at around the rate of recent years, while the United States had recorded a strong rebound in growth in the June quarter. In contrast, economic activity in Europe remained weak, with real GDP in the euro area unchanged in the June quarter and the unemployment rate falling only gradually. Inflation had declined further and remained well below the target of the European Central Bank (ECB) of below but close to 2 per cent.

Commodity prices overall had declined a little over the past month. The price of iron ore had fallen to around its recent lows while coal prices were little changed, following sharp declines earlier in the year.

Domestic Economic Conditions

Members began their discussion of the domestic economy by considering developments in the labour market. Overall, conditions remained subdued. The recorded unemployment rate increased to 6.4 per cent in July. This was concerning, though members noted that interpretation of this increase had been clouded by significant measurement issues and that other labour market indicators suggested conditions had not deteriorated to the extent implied by the increase in the unemployment rate. While employment growth had moderated somewhat in recent months, employment remained about 1 per cent higher over the past year and forward-looking indicators of labour demand had been improving modestly since late last year. Members noted that forecasts of a period of below-trend growth in economic activity meant that it would be some time before the unemployment rate declined consistently.

Members observed that the degree of spare capacity in the labour market was apparent in the slow growth of wages. The wage price index for the June quarter indicated that annual wage growth had remained around the slowest pace seen in the 17-year history of the series. Business surveys and information from liaison with firms suggested that wage growth in the private sector was likely to remain contained at around its recent pace over coming quarters.

Members noted that the June quarter national accounts were scheduled to be released the day after the meeting. GDP growth was expected to have slowed from the strong growth recorded in the March quarter, with export volumes declining following the very strong growth in the March quarter. Domestic demand was likely to have been supported by further growth in dwelling investment and moderate consumption growth.

A number of indicators – including retail sales and measures of consumer confidence – suggested that household consumption had increased moderately in the June quarter. More recently, the value of retail sales had picked up in the month of June and measures of consumer confidence had rebounded to around average levels. Information from liaison with firms suggested that the value of retail sales had increased over July and August.

Members noted that dwelling investment had expanded further in the June quarter and that leading indicators pointed to continued growth in the months ahead. For new dwellings, loan approvals and first home owner grants had increased strongly over the year and dwelling approvals remained at a high level despite having declined a little since late last year. At the same time, a wide range of indicators showed that conditions in the established housing market continued to strengthen. In particular, housing prices had been rising at a rapid pace and auction clearance rates were above average levels. Housing credit had continued to grow at an annualised pace of around 7 per cent, with investor credit a particularly strong component.

Recent data suggested that business investment had been little changed in the June quarter. For the non-mining sector, the ABS survey of firms’ capital expenditure intentions had been revised slightly higher and continued to imply modest growth in non-mining business investment over the course of 2014/15. Members noted that survey measures of business conditions and confidence continued to improve across non-mining industries and were now above their average levels. While mining investment was estimated to have been little changed in the June quarter, it was expected to decline significantly over the next year or so, consistent with what had been indicated for some time by liaison contacts.

Financial Markets

Members commenced their discussion of financial markets with the observation that conditions remained similar to the previous month. Markets continued to be characterised by low volatility despite ongoing geopolitical tensions and uncertainty about the timing of the first interest rate increase in the United States.

The ECB left policy rates unchanged at its August meeting and planned to conduct its first targeted longer-term refinancing operation later in September, which was expected to see the ECB balance sheet expand again.

Major sovereign bond yields fell over the month, with yields on 10-year German Bunds falling below 1 per cent for the first time on record and yields on two-year bonds again falling to below zero. Members noted that the recent fall in yields on Bunds had reflected a fall in inflation expectations rather than in real yields, as had been the case previously. US 10-year bond yields declined to their lowest levels since mid 2013.

Yields on Australian government bonds also declined over the past month, as the falls recorded early in August after the release of the labour force data for July were only partially unwound following an improvement in measures of business and consumer confidence.

Global equity prices were generally little changed over the past month, although the US market had reached new highs. The Australian equity market had also shown little net change over the past month, with company earnings announcements broadly in line with expectations.

Conditions in foreign exchange markets, including for the Australian dollar, had remained quiet over August, with volatility remaining at low levels.

Members noted that Australian banks continued to raise funds relatively cheaply, with a recent issue of residential mortgage-backed securities being of record size in the domestic market and occurring at the tightest pricing since the financial crisis. Reflecting lower funding costs and competitive pressures, rates on Australian intermediaries’ housing loans continued to edge down in August. The average interest rate on all outstanding housing loans had fallen by around 15 basis points since the cash rate was reduced in August 2013.

Members concluded their discussion of financial markets by noting that market pricing was for the cash rate to be unchanged at the September meeting and for the next year at least.

Financial Stability

Members were briefed on the Bank’s half-yearly assessment of the financial system.

Volatility in global financial markets remained low, as did the extra return that investors earned for bearing risk. Investors had been seeking higher yields in a range of markets. Members noted that a sudden change in risk assessment could lead to a sharp repricing of assets and could also disrupt the gradual improvement in conditions that had occurred in the major banking systems overseas. Potential triggers for such a reappraisal included revised expectations for the path of interest rates in advanced economies. In contrast, credit and geopolitical events over recent months that might have been expected to affect investor risk appetite had caused little reaction in market prices.

Large banks in most major economies had made progress in repairing their balance sheets, but this had been hampered by low profitability, which had resulted from weak economic conditions and, in some cases, fines for past misconduct. Asset performance remained especially weak in the euro area. In contrast, credit and property prices had been growing strongly in some emerging economies, including China until recently, which had made these economies more sensitive to adverse shocks.

Members noted that Australian banks continued to report improving asset performance and strong profits, which had contributed to further increases in their capital ratios. Australian banks and non-banks had both benefited from easier wholesale funding conditions globally. This in turn had encouraged stronger competition in lending for housing and to large businesses, but members noted that this had not, to date, led to a general easing in mortgage lending standards and policies. For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and, to a lesser extent, Melbourne.

Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later. The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending. Members were also updated on some of the recent actions by the Australian Prudential Regulation Authority in this area.

Members noted that commercial property markets in Australia had also been quite buoyant recently. Australian property had been yielding higher rental returns than were available overseas, which had attracted strong demand from both local and foreign investors. This had boosted prices even though rents for some types of commercial property had declined. In contrast, demand for finance from other parts of the business sector remained subdued, although business credit growth had picked up a little in recent months.

Members were briefed on recent international regulatory developments, as well as on the Financial System Inquiry Interim Report and the Bank’s supplementary submission to the Inquiry.

Considerations for Monetary Policy

The outlook for Australia’s major trading partners was little changed from the previous meeting, with growth expected to be a little above average in both 2014 and 2015. Commodity prices remained at historically high levels, although iron ore prices had declined noticeably over the past month. Global financial conditions remained very accommodative, with long-term interest rates falling further over the month and volatility and risk spreads remaining at low levels.

Domestically, GDP growth was expected to have eased in the June quarter following the strong outturn in the March quarter. Exports had declined and although mining investment was expected to have been little changed in the June quarter, it was set to decline noticeably over the next year or so. At the same time, measures of business conditions had improved and there was evidence suggesting that growth in non-mining business investment would pick up modestly over the coming quarters.

Labour market conditions had remained subdued, with recent data indicating a degree of spare capacity. Wage growth had remained low and it was likely that it would be some time before the unemployment rate declined on a sustained basis.

Members noted that the current setting of monetary policy was accommodative. Interest rates remained very low and had declined a little for borrowers since the cash rate was last changed. Investors continued to look for higher returns in response to low rates on safe instruments and were accepting more risk in doing so. Credit growth had picked up, including to businesses. Credit growth for investor housing was running at around 10 per cent per annum. Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation. On the other hand, the exchange rate remained above most estimates of its fundamental value, particularly given the declines in key commodity prices and, overall, had offered less assistance to date than would normally be expected in achieving balanced growth in the economy.

Accommodative monetary policy was supporting demand in some sectors of the economy, but policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage. Members judged that the current stance of monetary policy continued to be appropriate and was contributing to sustainable growth and inflation outcomes consistent with the target over the period ahead. Members considered that the most prudent course was likely to be a period of stability in interest rates.

Every communication of the bank should currently be aimed at kicking the dollar lower as its momentum is down. These guys are waffling fools.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. If don’t believe that you really think that what the RBA says can meaningfully change the value of the $A for anything more than a few hours.

    Foreign exchange is currently a case of looking for the least worst currency. Australia, like it or not, is running a hard currency regime. Most major economies are patently not.

    Whilst the price of iron ore, worries about China etc are very compelling stories, at this point, that’s all they are. This may well change of course but it is flows which move markets, not stories, and notwithstanding the last few weeks of $US strength, I fail to see a meaningful seller of $A.

    I should add that it is very unlikely that Australia is the source of any meaningful currency flows.

  2. Captn Glenn looks like a slimy fish, rotting from the inside out. All the RBA & Federal govt decision makers have massive investments in property. So they stoke the fire as much as possible. To hell with commonsense or job responsibility, every man for himself.

    • Said it before and will say it again: the RBA, Government etc are shit scared of any sort of correction. Australia has some $1.5T tied up in property, a lousy 10% drop will wipe $150 billion off the headline figure. Imagine what that loss and the flow on effects will do to the economy – fucking trashed!

      • Strange Economics

        A 10% drop will break the undercapitalised mortgage insurers, with a few foreclosures.
        A 20 % drop will flow through to the banks themselves, as the mortgage insurers evaporate.
        So what just went up 20% can now go down 20%…..

  3. “Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation”

    I read observation as masturbation on first skim through.

  4. “Members were also updated on some of the recent actions by the Australian Prudential Regulation Authority in this area.”

    What “actions” is Kent referring to?

  5. Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later.

    I’m sorry didn’t you get the memo? Its all a supply-side problem. There is no such thing as speculative demand.

    • Your comment in the other thread – what a joke.

      An article which points out half a dozen reasons why demand for the dollar is the driver of the exchange – which it is pure fact – and you decide naaaah.

      In an economy like ours, where everything is imported, and we are entirely reliant on world prices for energy – a 30-40% drop in exchange is a 30-40% rise in the cost of living.

      End of story.

      • Ok, lets say some of the imported inflation is passed on to consumers, despite this being an economy where demand is weak, the ToT are in the sh*tter, manufacturing has closed down, and we’ve just fallen off the mining cliff. Of your 30-40% lets say 10-20% gets passed on.

        Even then its a one-off adjustment — like the introduction of the GST — and the RBA tends to “see through” one-off adjustments. They will not hike in that scenario, and no amount of I-wanna-house bleating will change that.

      • Again Lorax…how about all the demand for ‘fair’ wages. How about all those you call ‘rentiers’ in this country that I refer to as having monopoly power?
        “some”? Where is your evidence? I don’t have time to find it but only a day or two ago i was reading a paper on the difficulty of determining ‘pass through pricing’ in different economies. Yet you and others in here have the immediate simple answer that all of us private enterrpise importers have massive margins that we can allow to be just eradicated.
        Sure you’ll get a short term squeeze but as firms drop out you get consolidation which will be followed again by expanding margins. I’ve asked a number of times as to where you and others think we are in terms of ‘business consolidation’ in this country. Nobody has ever tended an answer. I’d suggest the evidence is that we are well into that phase already.

        There is a distinct difference between evidence and wishful thinking.

        All that said i agree re interst rates and my guess is the RBA will initially go for ‘looking through’ inflation because that is all they can do. The madness that might follow doesn’t bear thinking about.

      • how about all the demand for ‘fair’ wages.

        And this is going to happen in an economy where demand is weak, the ToT are in the sh*tter, manufacturing has closed down, and we’ve just fallen off the mining cliff.

        You’ve lost the plot flawse.

        Inflation. Boo! Did I scare you?

    • “Ok, lets say some of the imported inflation is passed on to consumers, despite this being an economy where demand is weak, ”

      So what ? stagflation is an absolute killer – that’s why it has a name.

      “the ToT are in the sh*tter, manufacturing has closed down, and we’ve just fallen off the mining cliff. Of your 30-40% lets say 10-20% gets passed on.”

      No, lets assume the full 30-40% gets passed on – because you don’t just ignore the rest of the drop ? Are you on crack ?

      “Even then its a one-off adjustment — like the introduction of the GST — and the RBA tends to “see through” one-off adjustments. ”

      I’m pretty sure that a depreciating currency is not going to be a one off event. It is going to be a LONG and miserable decline. Not an over night one off event.

      And will that somehow negate the fact that Petrol, Gas, Diesel has all gone up 50% ?

      We are not talking about 1% or 2% here either.

      Inflation is ALREADY at the absolute peak of its allowable bandwidth. So any rise is going to necessitate action.

      The only people who fail to see this are those that FORGET what such a massive increase in energy costs does to an economy – smashes it. The GFC was initiated specifically by oil prices rising rapidly to $147 – this was THE PRECURSOR which brought it all unravelling.

      And finally

      ” no amount of I-wanna-house bleating will change that.”

      My family business owns a huge number house blocks / apartments within 5 km of Melbourne and some of Victorias most valuable coastal real estate and has done so for almost 100 years – I have no need to bleat.

      This is about my country, this is about doing what is right for the nation – unlike you who only gives a shit about your pathetic wanna-be-housing-tycoon investments.

      You should be ashamed.

      Edited for privacy

  6. RBA Cash Rate ………………..2.5%
    RBA. Inflation Rate …………….3.0%

    Real RBA Cash Rate *minus 0.5%

    We have Severe Financial Repression

    Reason for this: RBA is expecting an Economic Depression

    Are there any other reasons for Financial Repression ?

      • Strange Economics

        RBA. Inflation Rate …………….3.0%
        Wage rate increase 2.5%. Tax rate average 33%.
        Rent increases 2%. – House price increase 12 % forever ! Capital gains tax rate 15-20%.
        Why work, when you can speculate…

        PS Can any of the
        people at this conference actually say “Bubble” outloud?

    • your forgetting that the REAL inflation rate is much higher, thus the magnitude of theft is much greater than you illustrate.

  7. this is as close as you are going to get to the RBA admitting they are worried about a housing bubble and that the only thing holding interest rates back is the high AUD. As soon as it drops when US rates rise you will see AU rates follow suit. Then this bubble is going to pop louder than the sub-prime crisis in the US. Remember 43% of loans are now interest only and over 50% are negatively geared (eg loss making) investment loans

  8. This is probably why John Edwards was talking down bubble; because he didn’t want to talk up the dollar.
    What does the RBA do though when Stevens is convinced there is only one instrument?
    Housing miGht be a problem. But the dollar is arguably more important. If I was in there shoes I would just cut rates to weaken the dollar, let the housing cards fall where they fall, and if it turns out bad at least they can say that Joe Hockey – with his superior housing market models and intellect – reassured them and the country that house prices reflected fundamentals.