Bill Evans: RBA to keep cutting!

From Bill Evans at Westpac:

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 0.75% at its November Board meeting.

While this result was what was widely expected today, markets had given a 50% probability of a rate cut following the move in October. Westpac was never convinced of that prospect and had pointed to the fact that central banks usually make very strong cases for a decision and markets can over interpret that sentiment. We were also concerned that very low interest rates were likely to adversely affect sentiment, as we saw in the response to the June and July rate cuts where the Westpac-MI Consumer Sentiment Index fell by 4.1%. Readers will be aware that following the October rate cut, the index fell by 5.5%.

For us, the most important aspect of the Governor’s November Decision Statement was the signalling around prospects for a cut in December. It has always been our view that policy would be unchanged in November and December, but when market pricing reached 50% for November, December pricing was around 90%.

There are two key signals to suggest that the Board will take a break in December as well. Firstly, the term “the Board will continue to monitor developments” was included in the final paragraph, with the term “monitor” implying no urgency to move. Secondly, the final paragraph also notes “the easing of monetary policy since June”. It is our experience that when central banks refer back to previous decisions, it is also unlikely that they plan to move in the near future.

However, we are mindful that the Board does not want the market to believe that it has reached the end of the easing cycle. That would put unwelcome upward pressure on the AUD. Consequently, there remains a very clear easing bias: “the Board… is prepared to ease monetary policy further if needed”.

As indicated in our preview to today’s RBA decision, we pointed out that it was unlikely that the RBA would change its forecast for 2020. The Statement refers to growth in 2019 at 2¼ per cent and gradually picking up to 3 per cent in 2021. That indicates that the current growth forecast of 2.8% in 2020, which was adopted in August, is likely to be retained in Friday’s Statement on Monetary Policy.

The growth forecast for 2019 has been lowered from 2½ per cent to 2¼ per cent. When the 2½ per cent forecast was made, the RBA was unaware of the “softish” 0.5% GDP growth for the June quarter. With the first half of 2019 totalling 1 per cent, the 2¼ per cent forecast implies two quarters of around 0.6% growth in the second half of 2019. Westpac expects 0.5% in the September quarter.

Other key themes remain unchanged from the October statement: global economy risks are tilted to the downside; the main domestic uncertainty continues to be the outlook for consumption; the unemployment rate is expected to remain around 5 ¼ per cent for some time, before gradually declining to a little below 5% in 2021; wages growth is expected to remain around the current rate for some time; and there are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.

Some additional insights are: other sources of uncertainty include the drought and the housing construction cycle; and the recent inflation data were broadly as expected.

Conclusion

There is nothing in this Statement that prompts us to revise our current forecast that rates will be on hold in December with the next and final rate cut occurring in February next year.

Following that move, the state of the economy will be such that further stimulus will still be required, without which an unwelcome lift in the Australian Dollar would pose a significant headwind for the RBA’s current forecast of return to trend growth in 2020. Under those circumstances, it seems reasonable that the RBA might move towards some unconventional measures to boost demand and retain downward pressure on the Australian Dollar.

Yep. Bill’s advantage is the same as that of MB, he watches the economy more than he watches the RBA. Everybody else does the opposite.

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. GunnamattaMEMBER

    I find myself wondering if – given the retail data of Monday – we actually have a contracting consumer all the way into Christmas, and the (risk of) subsequent free fall in the New Year.

    I would happily defer to Bill’s analysis, but do find myself wondering if the statement ‘the Board will continue to monitor developments’ (which is a pretty crazy thing to state anyway – does the Board ever not monitor developments?) was more a hat tip that there is a risk things may get worse faster and they may need to do the only thing they can do apart from jawbone.

    • SnappedUpSavvyMEMBER

      this could happen, its still very slow and were into November, this is the month a lot of businesses make enough money to tie them over till march, if things don’t pick up there will definitely be a free fall in February and the RBA will cut and it will make not a bees dick of difference

  2. RBA will cut what?

    one more cut, and than quickly start buying junk RBMS from big fout to bail them out before it gets too late

    around 25% of big 4 book is junk not worth anything, subprime junk with default likelyhood of 90%+ over the life of loan
    perpetual IOs, liar loans, high LVR loans with huge repayments relative to income, underwater loans, high LVR loans to elderly people, equity loans used as deposits for multiple NG PIs, …

    • Oh, so there is lots to buy, that’s good. I remember economists doing handwringing about QE being “hard” in Australia, because there’s not enough debt to buy. Ahaha hahahahaha, not enough debt….. loosers.

      • Presuming you’re right Peachy (which I do) – what does one do for protection / profit against this? Get a house? Short AUD? Bonds? (Does the value of RMBSs rise much? they want to keep yields from rising but is there much upside there… and not sure one can simply buy RMBSs anyway…?)

        Not really asking for a friend, I’m buying a house anyway most likely… but intrigued to know your answer.

        • Well, matey, it’s pretty bloody simple – you want to be on the other side of the RBA trade.

          So if they’re buying RMBS, you want to be selling RMBS.

          ….What, what’s that you say skippy? you’re not a member of the protected species of “mortgage lender” and don’t have any RMBS to sell? Sucks to be you then, doesn’t it?!!

          • Well, yeah. So is there an alternative for the unwashed who want to remain un-shafted? I presume get offshore …

          • What kind of shafting do you want to avoid? Value of AUD savings going down? Against what? Foreign assets? Housing?

            If you’re buying a house anyway, like a good capitulating bear, you should just pay down that debt, most likely.

            Alternatively, you can keep the debt on foot (say you can secure 2% funding, trust taking some of the gravy being poured on by RBA) and invest in funds that hold RMBS ….or non-AUD assets – depends on your risk appetite, really.

          • The Traveling Wilbur

            @Peachy Sniggered at that. Clever.

            @A2 If you want to milk this for all it’s worth, you only need to look at what happened overseas. Stocks to the moon. Deposits near worthless as money will ‘cost’ even less, as it will be more ‘liquid’ (available). And apparently we are all supposed to buy bonds too. Apparently.

            Peachy is saying the best way to make money from this is to be a bank.
            Failing that, which is the case for most of us, the next best thing is to get on board with the good old RBA. And have some of what she’s having.

            The geniuses will already be buying what’s going to go up later.

            Not advice. Possibly not even coherent.

          • +1 to Peachy and TTW – Hence why I have moved out of holding a large cash deposit and into an asset. I may start buying some Gold, index funds (but not yet) and possibly bonds too. But first pay down my debts to 0 or as close to. Everything looks bubbley to me, the way I’ve been positioned over the last few years is that 1 trade would win, but another would fall as a result. So it kind of meant I just remained in the same spot.

            EG: $USD would appreciate but $AUD depreciate, likewise with Euro. Or stocks would fall and so would property. Stocks would rise and so would property. I found I couldn’t win really. But I was also diversified which is a good thing.

            My advice (since this is what I’ve done) is aim a bit lower, buy a house which you can comfortably afford or own outright and remember if it’s PPOR and prices fall across the board, trading up to the next place also gets cheaper. So if you’re buying and selling into the same market it doesn’t matter, especially if the debt is low. But make sure you buy a house with good attributes (quality build, locations, schools, lifestyle etc..) since those things will always be a drawcard regardless of if prices are up or down.

            Since interest rates are likely to remain low long term (I’m talking 5-10 years IMHO). $200k at 3% or lower is very comfortable compared with renting. So if you can buy in at $500-$600k and have about $300-$400k deposit. Do that.

            Obviously avoid the crap thrown up in the last few years in particular, townhouses on the fringe, apartments built by dodgy bros. or similar.

            This is not financial advice, of course lol..

          • Thanks both. I’m mostly asking for academic interest. My own position remains capitulating bear (a very elegant yoga position consisting of being sprawled flat while others point and laugh). Only question is when to move main house deposit out of USD and into AUD (and the realistic answer is whenever some chunt accepts my offer on a house). If I have any cash left it could go into the offset but I am being offered a shockingly low home loan rate of 2.84% (or 2.68 fixed for two years) so there is some temptation to put it somewhere that will grow faster than the mortgage interest after tax… or just play it safe as always and just use this low interest environment to smash the mortgage as fast as possible.

    • Jumping jack flash

      Hmmm… sounds like something directly out of the book on “how to create a booming economy using debt and nothing else”.. somewhere towards the back, in the section “what to do when it all turns to the proverbial”.

      Seems suspiciously similar to 2010 in the US and much of Europe….
      That worked great! Boom times all round.

  3. AIG PMI for employment composite now consistent with stable, to slightly lower unemployment and the wages series is consistent with stable wage growth.

    Doesn’t necessarily change the macro call just yet, but likely buys the RBA some time to see how things play out.

    Don’t agree with Bill on Feb. Lowe gonna sit on his hands for now…

    Oh, and these Aussies are all wrong on QE. The main effect will be selling of Aussie as foreigners sell their bonds to the Bank… QE will work in Oz and NZ via FX, with rates effect ancillary.

  4. Jumping jack flash

    “However, we are mindful that the Board does not want the market to believe that it has reached the end of the easing cycle. That would put unwelcome upward pressure on the AUD.”

    Lol! If that’s their reason for continuous cutting then they’ve got some interesting times ahead!
    If they haven’t reached the end now, then next time, maybe?
    “So, guys, guys… you’re at 0.1%, surely you’ve reached the end now?”
    “Reached the end? Never! We can and will go lowerrrrr!!”.

    At the end of the day there is no way we can win another currency war with the US. In fact, some say that is the reason for the latest cuts, nothing to do with the economy, jobs or wage inflation at all, and I’m inclined to believe it.

  5. 0.75% …. 0.50% … 0.25%

    Does it really make a fundamental difference at this point? Not to those who are capable of thinking it doesn’t. At this point we are scraping the bottom of the barrel. It’s all signal, otherwise practically useless. Keynes has got his wish and euthanized the saver so it’s debt, debt and more debt, all the way to the outright failure of the monetary system.

    • proofreadersMEMBER

      But, but our property PM and Josh Rainbowberg just love ZIRP? Absolutely, confirms everything is going swimmingly and that the LNP are the best economic managers? And if it doesn’t prove that, then it’s all the fault of Labor and global headwinds?

  6. “..Under those circumstances, it seems reasonable that the RBA might move towards some unconventional measures to boost demand and retain downward pressure on the Australian Dollar…”

    Reasonable?

    More like

    “..Under those circumstances, it is predictable that the clueless and confused RBA might think that the best move, to continue to inflate asset prices and make rich people richer, is to start buying those assets directly…”

    The only entertaining part of this dystopian wasteland of policy stupidity is observing the “cats watching TV” expressions of the mainstream economic commentary.

    Only last night I had a keen connected observer tell me that it was amazing how inflation remains so low with interest rates so low and that “nobody” knows what is going on.

    https://www.smh.com.au/business/banking-and-finance/weak-bank-lending-numbers-reveal-rate-cuts-aren-t-working-20191105-p537k9.html

    Almost the entire policy class is thoroughly infected with economic myths and fables and don’t know it or refuse to consider the possibility even in the face of a mountain of empirical evidence.

    All they are doing is spending more and more time developing more complicated models that prove that the sun revolves around the earth.

    • It’s hard to make a man believe something that his livelihood depends on him not believing.
      Economists are there to convine people of the righteousness of how the economy is being run.

    • Bravo!

      It would all be hilarious if people weren’t being financially massacred by these f#cking cretins, but it’s basically game over for many. I’ll never be able to buy a home. I’m seeing my income decrease in real terms: despite claims of low inflation, I’ve never seen low inflation in anything I need.

      Given the likely consequences of QE and low rates, one might expect a lot of noise from the media. They never stop telling us about risks associated with other activities (climate etc), but on monetary madness there’s essentially radio silence. If a story does get published it barely makes a dent in the zeitgeist e.g. I’ve seen the “gender pay gap” flogged on ever panel show, multiple times, yet almost nothing on a subject that will affect us all far more.

      The infuriating part is policy makers and media cheerleaders must know the consequences, MB sure do, which is why seeing them support rate cuts and QE just fills me with rage.

      Burn it all.

      • The media are there to convince the population it is all for their own good and not to worry, the adults are in charge and have it all in hand. Expecting anything else is likely to result in severe dissapointment.

      • +1 Jim well said. And I for 1 am sorry that your dreams of buying a home are being crushed. I’ve known that feeling for the past 6-7 years. It’s not nice and I honestly feel it has huge mental health implications for many.

        • Yeah it’s not a great feeling. I was happy to see you finally get a home, though. It’s great to see some of the MB crowd getting a chance to build a life. All the best mate.

          • Thanks mate, I honestly think your time is coming though. Things can’t continue like this forever. I’m sure Peachy will disagree though! 🙂

    • I would suggest to the boffins that claim no inflation is to be found is that they don’t know where to look. Just like a Youtube clip I saw the other night of an insurance company that looked for a boat that sank in a Canadian lake and all the experts couldn’t find it, so paid it out. Some young divers went looking, found it and pulled it up. It was worth at least $200k apparently. So finders keepers. The RBA is like the dumb insurance company boffins, finding that inflations is far too hard for them. But the every day person can see it if they look and they observe it with every day items. Insurance, housing costs, groceries, medical costs, road tolls, parking costs, registration, vehicle maintenance, childcare costs, costs of having a child and education and on and on it goes.

  7. I’m starting to think that the RBA is sending the government a big FU.
    The gov does nothing to help the economy yet pressures the RBA to drop rates. At the same time it claims to be “good economic managers”, when it’s actually pure dumb luck.

    I’ve got a feeling the RBA has thrown its hands in the air and said “Alright, you want lower rates? Here’s your lower rates and when it gets to zero you twats in government are actually going to have to do something.”

    • Possibly, I expect the Government expects the RBA to keep doing all the heavy lifting via QE or the madness of negative rates while they try to protect their precious surplus.

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