Bill Evans on the RBA

From Bill Evans at Westpac:

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.

The Governor’s statement indicates that the Bank is feeling a little more comfortable with the outlook. Growth prospects have improved and the heat seems to be coming out of the housing market.

Evidence to support a more confident growth outlook is the following:

  1. Whereas in August, the Bank referred to “the central forecast is for the economy to grow at an annual rate of around 3%”, the September statement confirms the expectation that “growth will gradually pick up over the coming year”. Note that the Bank’s current forecast for GDP growth in 2017 is 2.5%, lifting to 3.25% in 2018, and 3.5% in 2019.
  2. The recent capex survey pointed to a lift in services investment. Our estimate is that the growth in services investment intentions in 2017/18 increased from 6% in May to 10% in August. The Governor responded by noting that “the outlook for non-mining investment has improved recently”. That confident statement compares with the milder “some pick-up in non-mining business investment is expected” (August).
  3. The outlook for employment growth is described as “solid” (September) compared to “continued growth” in August.
  4. While sentiment towards wages growth remains cautious, the Governor felt emboldened to predict “some lift in wages growth over time”. In August there was no reference to the outlook for wages, only the concerns around the impact of slow growth in real wages and high levels of household debt (a sentiment repeated in September).

Commentary around the Australian Dollar is unchanged. This is hardly surprising given that the AUD remains in that USD 0.79-80 range (although in TWI terms, the AUD is around 1% lower than we saw at the August meeting). The commentary refers to “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. This approach is more realistic than attempting to “jawbone” the AUD given that markets are almost certain that the Bank would neither cut rates nor intervene. The language implies that further increases in the exchange rate would threaten growth and inflation.

To compound the good news, the Governor seemed more confident that housing conditions are easing. In August, he noted “some signs that these conditions are starting to ease”, whereas in September he indicates that “there are signs that conditions are easing, especially in Sydney”. Observations( in August) that prices are declining in some markets; additional supply of apartments is scheduled to come on stream; investors are facing higher interest rates; and credit conditions have tightened were repeated in the September statement.

Comments around the global economy are unchanged. The Governor continues to expect that Australia’s terms of trade will decline over coming years and to see the Federal Reserve further increasing interest rates. This may imply that he expects the AUD to ease, although the Bank does not make currency forecasts.

Conclusion

We cannot deny that the partial data has generally been constructive. That supports the Bank’s decision to be more optimistic about the growth outlook. We expect that will be further confirmed with the release of the June quarter GDP report where Westpac is forecasting a 1.0% increase, supported by strong consumer and government spending  and net export growth.

On the other hand, as indicated in the Governor’s statement, risks around the consumer associated with weak wages growth; ongoing spare capacity in the labour market; and high household debt still threaten the current growth momentum. Indeed, we expect that these factors along with a downturn in the construction cycle and net services exports are likely to slow momentum through 2018.

We do concur with the Bank’s observation that the heat is coming out of both the Sydney and Melbourne housing markets as credit conditions tighten under the weight of increased regulation.

Under these circumstances we do not support current market pricing which points to the beginning of the rate hike cycle in mid 2018. We continue to expect rates to remain on hold in 2018.

Comments

  1. “Under these circumstances we do not support current market pricing which points to the beginning of the rate hike cycle in mid 2018. “”
    Bwahahaaaaaaa!!!! What else might we expect from the Bankers??? Just ignore the fundamentals of negative RAT interest rates driving rapidly rising debt on all fronts so that the Banks can have more profits and the execs can get off with their bonuses while selling future generations down the drain.
    Evans has become a total waste of space.

    • Do you really expect interest rates to rise at the OCR level ….. really?

      One who has irrational expectations is tantamount to having fixed, false beliefs that are difficult to change, despite considerable evidence to the contrary ; I believe that is defined as * delusion *. Also, when one constantly does the same action [ like repeatedly deriding the RBA on their interest rate management agenda ] yet expecting different outcomes from that same actions, that action is specifically termed by Einstein.

      Come-on now, flawse, are you not better than that? … that is Economics 101 that you’re spruiking. Of course, the bankers know the effects of negative interest rates – including those ‘too-obvious-to-mention’ ones, you yet find yourself mentioning.

      Meant to help …. OK . Regards

      • Yes – Bill Evan is right

        Unless the US suddenly wakes up and realises that allocating resources to speculation and unproductive investment is a luxury that only lazy sun loving Deputy Sheriffs sitting on large continent sized lumps of dirt can afford.

        If that happens then we may well see rates in the US rise and if that happens it will not really matter what the RBA think as the doggy will have started wagging its little fluffy green and gold tail again.

        People have tended to downplay US rates rising because they have assumed that Trump will not actually deliver on his promise to drive production back on shore and productive investment in infrastructure etc. If that does not happen, so the thinking goes, the US economy will start to sag and the US Fed will not be able to keep raising rates.

        And there is some good reasons so far to question whether Trump will deliver.

        But the thing that is outside US control is China and China has been very determined in maintaining state control over credit creation. For all of the ghost cities and memes of that nature the fact remains that China has been channelling vast amounts of investment into stuff that is actually expanding the Chinese economy.

        Forget about the risk of war as that is not really the threat the US is facing. The threat the US is facing is that China’s capacity to spend and win hearts and minds around the world is increasing dramatically because China is focused on productive investment. China is getting richer and richer because they invest in stuff that is making them richer and richer.

        The US simply cannot afford to keep pissing away resources on speculation and asset price ponzi schemes.

        Neither can Australia of course but we are a bunch of lotus eating boofheads and our fate will be to moan about how no one warned us that running up massive external liabilities was an exercise in self indulgence and stupidity.

        Rich counties like Australia should be exporters of capital not importers of capital – especially when the capital we import is being pumped into speculation and consumption.

        But don’t tell clowns like David Uren, Ross Gittins, Jessica Irvine et al as they all think that unproductive capital inflows are perfectly fine.

      • Rebirthed
        It’s just frustration!!!!! I’ve been at this a long time.
        Economics 101 – maybe. The full economic and social effects of running negative RAT interest rates driving a CAD and equating asset sales with earned income are not understood by even the highest levels of academia – perhaps deliberately. There are a number of PhD’s to be had in amongst that lot. There is a wee groundswell in the USA starting to bring this stuff forward at an academic level and CB level. Again the simple stuff maybe but again
        What I believe is actually going to happen is another thing altogether. I’ve learned, from my son, to go with the actual numbers. If money has been printed it is a simple fact that it is out there and it will flow somewhere.

  2. Real growth per capita won’t be much if population is growing at 1.5% and inflation is 1.5% and the growth forecast is 2.5%, 3% and 3.5%.
    Big companies might be getting the growth in nominal terms, but the average punter will be getting nothing per capita in real terms and after tax will be going backwards in real terms.
    It’s the Turnbull punters’ personal recession.