RBA bubble managers to hold again in May?

See the latest Australian dollar analysis here:

Macro Afternoon

Will the RBA cut in May? Citi offers a great chart to show how in terms of the bank’s own “reaction function” that it should:


The chart shows how far behind the curve the bank is in its own terms. The next RBA opportunity to cut the growth outlook is in the May Statement on Monetary Policy (SoMP) three days after the next meeting. If it has any sense it will be cutting the growth outlook further. Consumer and business confidence is weakening, the terms of trade is literally collapsing, the capex outlook is terrible, the labour market is soft and likely to turn soggy in months ahead and the housing construction boomlet will peak in H2.  The only positive (in the bank’s view) is strong house prices and they are confined to two cities.

Fiscal considerations are also poor with the Treasurer already declaring that the Budget will be mildly contractionary as well, though I expect they will try to backend load the austerity. The Budget is May 14 but the bank will certainly be informed in advance.

The other consideration is the dollar which is on the verge of new lows but hasn’t cracked so far. The global settings for further material falls are not great with markets pricing a timetable for US Federal Reserve rate hikes from March next year, via Deutsche Bank:


These are OIS curves for the US (red) and EZ (blue). There’ll be little help from the Fed in lowering the Australian dollar for the next six months and European liquidity will be flooding outward in carry trades to any jurisdiction offering a ratings uplift.

I repeat, in traditional “reaction function” terms, there is no doubt what the bank should be doing, cutting rates, so there are only two explanations left for April’s hold: the desire to keep some ammunition in reserve and concern that the housing bubble will get even bigger. The first is a secondary consideration.

On the latter there is some vague evidence of an RBA framework that could illustrate trigger points around the bubble. Here is the chart courtesy of Chris Joye:

ScreenHunter_6973 Apr. 13 08.24

When the dwelling price-to-income ratio of Aussie housing approached 5.5% the bank has a habit of tightening. It happened in 2003. It happened again in 2007. Then again in 2010 when Capt’ Glenn began declaring of household debt that:

“…it’s pretty high now, and we’d surely be asking for trouble if we see a big step up from where we are.”

There are obviously many wider factors as well but the point stands. So, are house prices the RBA’s new reaction function over economic growth? It’s clearly influential and with legends like Saul Eslake declaring the bank “insane” if it ignores such you get some idea of the intensity of feeling inside the tent.

But facing the above oncoming and mounting economic gale, the bank can’t let house prices fall, either. As said, that’s all there is to local activity.

So, meeting to meeting, perhaps the best guide to RBA action now is housing data. Unfortunately it lags considerably so the most important live gauge is auction clearance rates, which remain bonkers post the February cut:

ScreenHunter_6966 Apr. 13 07.38

The conclusion is that unless you see tier one data that screams a sudden rollover in conditions – in sentiment or the labour market – it’s probably fair to say that the RBA will not cut again until auction clearances come off.

Houses and Holes
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