Bill Evans: Another rate cut coming

Via Bill Evans:

As expected the RBA Board lowered the cash rate by 25 basis points at its October meeting to 0.75%.

Westpac acknowledges that result given that we were the first forecaster to call the RBA cash rate below 1% (Bloomberg survey – May 24). Up until that time the 1% had been viewed as the effective floor for the cash rate.

Furthermore, back on August 2 we were only 1 of 3 (24 in Bloomberg survey) who called the next cut in October. Over the course of the subsequent weeks markets and forecasters moved in that direction such that market pricing gave an 80% probability to a cut today and the majority of forecasters moved to identify October as the next move.

Westpac still expects that there is likely to be another cut in this cycle. We have identified next February as the likely timing.

The Governor’s Statement certainly opens the door to even lower rates although a follow up move in November seems unlikely.

He noted, “The Board will continue to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”

Note the choice of the term, “if needed” which usually implies that time will be taken to assess the impact of the three cuts in this cycle before moving again.

Furthermore he has, for no reason that is justified by the data, adopted a bolder objective than had been the case before by aiming for “full employment” rather than the more modest, “reduce unemployment” that we saw in September.

It is also very important to note that a new key reason behind the decision figured in today’s Statement. “The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.” Clearly, the RBA is concerned not to allow unwelcome upward pressure on the Australian dollar as other central banks eased.

Overall, the themes in the Statement are in line with previous Statements: global growth outlook risks tilted to the downside; further monetary policy easing by other central banks is widely expected; Australian economy can sustain lower rates of unemployment and underemployment; inflation pressures remain subdued; little upward pressure on wages.

However, while the Governor confirmed the inflation forecasts of the Statement on Monetary Policy in August he did not do the same for the growth forecasts. In September he noted, “growth in Australia is expected to strengthen gradually to be around trend over the next couple of years. In the October Statement he cautiously refers to “a gentle turning point appears to have been reached” with no confirmation of the “trend growth outlook in 2020”.

Based on previous experience this suggests that the RBA may be preparing to lower its growth forecast for 2020 when we see the revised forecasts on November 8.

The commentary around the housing market is also interesting. While evidence of a recovery in prices in the established market is recognised he qualifies the outlook by pointing out that dwelling activity has weakened and credit growth remains low.

Conclusion:

On July 24 Westpac added a further rate cut to 0.5% by February to its rate profile. Today’s decision and the associated Statement make a clear case that the cycle is not over yet.

For that reason we are encouraged to expect another cut. It seems highly unlikely that the Bank would opt for back to back cuts as we saw in June/ July to signal the beginning of the cycle.

One of the key reasons why we favoured October against the Consensus view of November was that October provided the flexibility to move in December should global conditions deteriorate sharply. That is not our forecast so we remain comfortable with a February move for the next and last stage of this interest rate cycle.

Factors that will be important going forward will be the impact of this decision on private sector rates and the RBA’s confidence around unconventional policies.

It seems to me a reasonable supposition that 50bps is the terminal rate for now. The RBA will probably want to keep some ammo and the banks will be screaming blue murder.

That raises the prospect of unconventional measures sooner rather than later. I no longer think crisis beyond the everyday will be required to trigger them.

Houses and Holes

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 fouding 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.

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Comments

  1. You called October well Bill and you’re the only one of the Big 4 bank economists to call this well.

    BUT I was telling my hedge fund clients in mid-2018 that we were looking at sub-1% rates and was positioned in short-dated swaps accordingly… you weren’t the first. Redward Associates and MB were comfortably ahead…

    • The Traveling Wilbur

      And I’ve been telling the downstairs Teddy Bears that house prices will recover again (national average) very, very quickly for about 4 months. They worry as they get to see all the gloom on the TV news (until recently of course). But you don’t see me talking about it on here, ’cause… without date and time-stamped MB posts, it didn’t happen. As many have observed before.

      I’ll see if I can imgur some photos of the weekend picnic tomorrow though. They’re feeling much more lively last couple of weeks.

  2. The RBA, confused and adrift, is now simply following Bill’s calls.

    By January, the house prices will have finalised the bull trap and the inevitable price decline will be well and truly in gear again. Unemployment will be duly unchanged if not worse by then. February is right for the next cut.

    • Next cut will be done by Christmas. RBA knows that surge in house prices is on the back of low volumes and employment in construction is falling.
      There is a good chance for QE while house prices going up. This Gov is basically throwing the kitchen sink as we speak.

      Edit – except fiscal as Libs want surplus at all cost so they can say they did it.

    • The Traveling Wilbur

      @Les. Yep. Bill is seriously awesome. It’s a shame he doesn’t want to just chair the RBA directly.

      We should organise some MB funding for a shrine to be put up in Martin Place so that others will know his greatness. The plaque can read something like: “To Bill. Finance Journalist with original thoughts, that were right more than 50% of the time. A King in a sea of blindness.”

      From a grateful nation, 2019.

      I’d pay for that.

      • proofreadersMEMBER

        Bill must be Brian Hartzer’s and all the other other Big 4 CEOs’ pin-up boy – singlehandedly, Bill has pushed all Captain Phil’s buttons to drive interest rates down, so that the banks can screw retail depositors in to the grave and the banks can pay zip for their funding. Next mission for Bill is to guide the NIRP for the RBA.

  3. “.. That raises the prospect of unconventional measures sooner rather than later….”

    Unconventional measures?

    It might be helpful if we resist using the propaganda spruik terminology of Club Banker.

    “Unconventional measures” is referring to highly political action by an undemocratic and unaccountable body that is arguably outside its charter.

    It is one thing to argue that the RBA should have the power to buy and sell financial assets to allow it to manipulate the overnight lending rate between ADIs. At least everyone understands, if not accepts, that manipulating the interbank rate is part of what the RBA does and has been given authority to determine.

    It is another to argue that the RBA should be seeking to directly manipulate the prices of a whole range of other financial and non financial assets.

    It is yet another to argue that the RBA should be engaging in fiscal policy by purchasing directly securities issued for the purpose of delivering infrastructure or other government projects.

    We have been hearing a lot of hot talk lately that some of our politicians are displaying excessive interest in authoritarian forms of economic management.

    All of that pales by comparison to a specifically non democratic and non accountable institution like the RBA seeking to directly manipulate an ever increasing range of asset prices and to assume powers of resource allocation that are highly political and the job of the elected government.

    Unconventional?

    It is a fundamental usurpation of democracy.

    • Stewie GriffinMEMBER

      Lower interest rates have only ever been about perpetuating the status quo – it has had nothing to do with ‘smoothing the cycle’ but ensuring that the current dominant business models, based around consumption, remain in play. To the end that we are now at the effective floor the only means for them to be able to continue perpetuating the consumption machine will be to turn to “Unconventional methods” MMT, QE, money printing, whatever you want to call it.

      Basically it amounts to the last throw of the dice in order for our leaders to maintain stability a little longer – printing money will simply ensure that the existing paradigm continues for a little longer, that is, the productive efforts of our society continue to be transferred to our elites through debt and inflated asset prices, only now the transfer mechanism will be outright debasement of currency as opposed to interest rates.

      It will succeed for longer than most people would who doubt it will work would think possible too, because the risk pricing mechanism embedded in Interest Rates and the yield curve has already been completely destroyed, and the general population, although increasingly restless, are so incredibly poorly served by their media that they have no idea as to what is really taking place.

      Creating money out of thin air will work only for as long as they maintain the mass migration that can hide the expanded money supply within a higher head count. This will only end when the social instability created by the measures taken to ensure economic stability start overwhelming every thing else…. basically the sooner Westerners start blowing up building and ending treacherous MPs, the sooner it will be over. Until then, sit back and enjoy QE4, QE5, MMT, direct MMT, helicopter money and every other measure designed to maintain the status quo.

      • Jumping jack flash

        +This!

        Its all about the debt growth that must continue forever otherwise everything stops. But it doesn’t just stop, it unravels very quickly.

        • Stewie GriffinMEMBER

          It will unravel quickly – but before it does it will continue on for far longer than any ever suspects. To paraphrase or misquote F. Scott Fitzgeraldon on bankruptcy “At first you go bankrupt slowly, then all at once.”

          This will be how the existing paradigm under which we are all familiar will end, slowly, slowly, slowly, until we reach an inflection point and it happens all at once.

          I use to mock the Boomers about how they will go to sleep one day and wake up to find the world completely different…. that sadly will be the reality for all of us, and the one we move into will be filled with brutality, indifference and vengeance. I wouldn’t want to be a minority, sitting all exposed and entitled when that day comes.

          The irrationality of loss is far greater than the reason of success.

    • Yes and no. As a retailer the day after the Melbourne cup is always lousy because the customers are broke, hungover and annoyed at themselves for all the money they gambled and spent on new frocks.

  4. proofreadersMEMBER

    “….and the banks will be screaming blue murder.”

    No, to the contrary they will be over the moon with joy, as they will be able to continuing screwing retail term depositors until they are dead, buried and cremated.

    • I pulled all our money out of ING. All in trading account now. Some already in gold stocks but most available. Waiting on solid crash and then I will park them all in selected companies. I’d rather risk and lose them on the share market than to give them to the banks to just eat them via fees and negative IRs.

      • Diogenes the CynicMEMBER

        You won’t be the only one to do this! Have you got some bonds or Betashares USD? They at least pay some interest and will probably go up in the scenarios talked about.

      • proofreadersMEMBER

        No – you’re talking about PB Tim Wilson’s excess franking credit “refund” leaners and I’m not one of those or any other sort of leaner.

  5. proofreadersMEMBER

    “That raises the prospect of unconventional measures sooner rather than later.”

    Ah, good the RBA happy clappies can start undertaking their medical experiments – that should help fill an otherwise boring day?

    • I’m halfway to convinced that the RBA is sick of being pressured to drop the rates an they have flung their hands in the air and given up “Fine, you want low interest rates, we’ll give you low interest rates!”

      If rates hit zirp, the RBA will be utterly neutered and the government will be forced to finally do something,

      What stupid @$$ waste of taxpayers money remains to be seen. Infrastructure would be good, preferably in the form of dams.

  6. In my naive mind adjusting the Cost of capital (through interest rate and other measures) is intended to shift the balance of the economy either in favour of Capital or in favour of Labour.
    In theory low interest rates should result in companies borrowing money to expand. This could mean building additional plant or designing new products or simply expanding their workforce. All of these result in additional Human capital being deployed within the economy this happens because the balance in the costs of Labour vs Capital has shifted.
    Well that’s the theory that I remember reading somewhere. BUT what happens if this is not true, or not even remotely close to the truth? What happens if this revered wisdom turns out to be just plain wrong?
    I suspect we’re all learning the answer to that question. Instead of Capital investment enabling Labour we have Capital Investment enabling Capital Investment in a self perpetuating doom loop where Labour simply gets shafted.
    Ah but our theory rests on strong foundations, is your retort. Maybe and maybe not is my response but what we’re all living through sure doesn’t look to me like Capital enabling Labour, matter of fact it looks remarkably like Capital crushing Labour, which raises questions wrt Capital’s purpose if not to enable Labour.
    This goes to the very core of our social contract. If Capital does not enable Labour than why should workers respect the processes of Capital accumulation and reward this endeavour?
    All kinda has me wondering if it’s not time for Australia to try a different economic religion. I wonder if this is what Phil has in mind when he uses the phrase “Unconventional Measures” ?

      • Thanks very interesting. It all makes perfect sense now that we are living with this insanity. I must admit until recently I saw Japan as an economic outlier implementing half hearted measures when everyone knew the solution was to stimulate, stimulate and stimulate some more. Whatever the problem more money was the cure…..until it wasn’t.
        What happens if deploying additional Capital decreases Labour Productivity. it’s an outcome we’re told should never happen but it sure does seem to be today’s reality.
        As was stated in the video, Logically any company that cannot find (create) new / additional business value which exceeds the cost of capital should simply close up business and return the money to their shareholders because the company has ceased to exist for the purpose that it was created..it has ceased to function.
        But that’s not what’s happening, Capitalism it simply not creating business opportunities, which begs the question: Why sould any society tolerate the excesses of Capitalism If Capitalism fails to deliver good (even adequate) outcomes for most of the population?

    • good point. About 3 years ago I proposed that Capitalism (as we now it now aka cronysm) is on its last legs and new system is needed because of same issues you just mentioned.
      Today we are faced with overcapacity in everything as we already built too many production plants around the world. On top of that – welcome automation. Every time a company invests in new plant means less labour not more. This is true for Car industry, Mining, Pharma, Electronics, Electrics, Heavy Industry etc..

      Also, most companies use cheap IRs to initiate share buybacks instead to invest on R&D and/or new plant. Boeing is one classical example of that.
      https://wolfstreet.com/2019/07/24/i-got-it-nothing-matters-tesla-boeing-stocks-like-the-whole-market-has-gone-nuts/

        • Exactly, This is exactly the problem which Marx saw with the Capitalist system and for the exact reasons that Marx outlined, it just took a lot longer than Marx expected.

      • “Today we are faced with overcapacity in everything as we already built too many production plants around the world.”

        There is no such thing, latent demand is infinite, real demand is limited by the means to acquire.

        It has been the outcome of shifting from wage share to profit share for two generations now, but the outcome is entirely predictable.

        If you want to pay workers less, then who do you expect your customers to be?

        We hear the Bernard Salt’s talking sh*t about smashed avocados, as in this gratuity is the cause of all economic woes amongst young people, for not engaging in delayed consumption.

        Salt doesn’t seem to understand that this is part and parcel of the pricing in the composite of our economy, if this is delayed, or deferred, or reallocated into housing, then the economy looks incredibly different, most of all to the smashed avocado seller.

        To exercise a real demonstration of power, then withholding all spending in one sector should be held en masse to show ‘this is what delayed consumption looks like’…. let them source business from those with an increased profit share instead….

        Two generations ago, wage share was around 62% and profit share around 18%, now it is around 53% and 28%…..

        labour is effectively receiving 15% less for the same roles, while working longer hours and having less job security….

        Now imagine a citizenry having 15% more discretionary income, and not having to service ridiculous levels of personal debt with levers set to balance an effective price of land….I would be quite confident in saying if only those two changes were implemented, the health of our economy would be markedly different…..

        I would gather to say those ‘too many many production plants’ would have no problem having its product absorbed.

    • In my mind I’ve been saving and investing diligently for 10 years and my purchasing power relative to house prices keeps going backwards. Yet we are told inflation is low. The real crime is that house prices are not measured as part of inflation if they were interest rates would not be so low.

      The system has been rigged to serve the lazy, the unproductive chumps at the cost of the hard working. It’s time we overthrow this lot and hang them in the streets. Starting with Phil Lowe.

      • Maybe BUT after we got done with all the euphoria associated with punishing the guilty would we honestly be any closer to addressing the real underlying problem.
        If additional Labour cannot be Productively deployed through the use of additional Capital than neither Labour nor Capital has enduring value. It doesn’t matter what monetary system you imagine if this fundamental equation fails than fundamentally we’re F’ed (this is basically the conclusion of the Richard Koo video referenced above). Maybe the answer to to restructure our society into one where Labour is organized by means other than Capital deployment. Under most of the original Socialist models Capital had no place and labour was centrally organized. Everywhere that this was tried it was an unmitigated disaster, so Socialism evolved and created capitalist efficiency within a socialist (planned) framework (that’s kinda what China is today) .
        Anyway, Personally I’d focus on the what next question? before I got too busy tying nooses and pointing fingers at the guilty (regardless of how guilty they are)
        Try this video
        https://www.youtube.com/watch?v=8YTyJzmiHGk
        but remember that in a market where labour is free to move/relocate we should see new companies established that eat the old companies lunch …this is what’s really missing

    • You’ve found the way to be right, Peachy. It’s to give up any and all hope. Most of us just couldn’t stomach living as a soulless husk. Bravo!

      • You’ve got to put your hopes in the right things.

        Refer the Serenity Prayer.

        If you keep hoping for things despite reality, we’ll, you’re setting yourself up to be dudded. To fail. To be a looser.

        • Not really, Peach. 80%+ net return (without leverage) in 5 years (even before allowing for the sagging AUD) doesn’t feel like losing to me. There are plenty of options outside Australia. But I’ll continue to hope that Australia wakes from its insanity so I can invest in my own country. Different things make different people happy and there are many definitions of failure, I guess.

      • Give yourself to the Moron Side. It is the only way you can save your loved ones. It is unavoidable. It is your destiny.

    • Ha .. it’s all we can do is to see humour it this bat sh1t crazy world. House prices to the moon and more immigration (ah I mean demand) for housing (plus everything else). Also when Phil does his QE (which he’ll do because IR cuts won’t do the trick) further boost to housing. That won’t work so we’ll need more demand/consumption and they’ll be paying people to move here to buy more housing…

    • Jumping jack flash

      +1 and we really need a rate cut to make it rain… will someone think of the farmers!?

  7. Surely at some point the RBA has to provide the ultimatum to the govt that they won’t be gifting more cuts or worse still going down the rabbit hole of QE unless they pull their weight too/drop the surplus obsession. Otherwise they’re just being like the bloke asking Sideshow Bob to leave town.

    A close second in the wuss stakes is the ALP who, four and a half months later, still appear to be licking their wounds and unable/too scared to hold the govt mismanagement to account, outsourcing it all to the RBA…

    • Jumping jack flash

      I doubt the RBA actually cares that much what the government does or doesn’t do.
      The government in reality does very little, nor do they actually want to do anything.

      The RBA’s actual purpose is to protect the private banks.
      Because the economy is now run like a bank, by bankers, it means banks are the most important thing for an economy, ever. They are the ones responsible for managing and creating the debt.

      That’s also why we get the whole TBTF and then bailouts, and what have you, whenever anything goes wrong.

      Whereas in reality, banks are kind of like the government (and lawyers) – fairly unnecessary for the day to day operation of a properly functioning economy, ie, one that isn’t built from the banks’ debt.

  8. Jumping jack flash

    “I no longer think crisis beyond the everyday will be required to trigger them.”

    +1 it is no “crisis” per se, it is just the everyday machinations of the system that will require all these ever-weirder contortions to continue to function.

    Once we crack the seal on some of these unimaginable schemes there is simply no going back.
    Well, I guess its a bit like interest rate manipulation…

  9. This is just bankster talk about the RBA needing to lower rates to help ease the level of unemployment, when the driver of unemployment in Oz has nothing to do with the cost of capital and everything to do with the high level of immigration. The media, bigBiz and the major political parties are in a conspiracy covering up the real issues on unemployment and lack of reported inflation.

    There is no case for the RBA to lower interest rates further to assist the unemployed, and its role should be to contain the flow of foreign capital that is pushing up the AUD above its natural rate, perhaps by measures that clip the ticket on the inflows. But the most effective way to limit foreign capital inflows is by govt FIRB measures that ensure only investment in productive non-real estate is allowed where new businesses are being established.

    • The Traveling Wilbur

      It’s not a conspiracy. The majority of them are just too dumb to know better. The vast majority.