Australia’s next move for interest rates is DOWN

The dance has begun again. We’re all going to pretend that the RBA is to lift interest rates. Nothing could be further from the truth. The next move will be down and to go negative.

How do I know this? Because history tells me so. The RBA was established in 1959 and the last eleven years is the only period of that length in which there has not once been an interest rate hike.

This is telling us something about the structure of the contemporary Australian economy. Without putting too fine a point on it, that it can only expand with a lower, not higher cost of debt.

The weekend press is full of quotes from Australia’s doyen of interest rate forecasters, Bill Evans:

The May employment report is a major ‘game changer’ for policy. It underscores the strength of momentum in the economy and endorses the range of other measures pointing to a very strong labour market.

The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly.

…We now expect that the RBA will assess that it has achieved the conditions necessary for the first interest rate hike by the first quarter of 2023.

On three occasions over the past ten years, I have bet Bill Evans that rates would fall when he said that they would rise. I am now three from three. Why will I soon be four from four?

The first clue comes from Chris Joye:

If one assumes the 333,900 non-resident jobs are all placed with locals who were looking for work (and not folks who are sucked into the labour market), this has the effect of temporarily reducing our unemployment rate by 2.4 percentage points. Put another way, if borders open and non-resident workers return and take these jobs, the unemployment rate would increase from 5.1 per cent to 7.5 per cent. Although this is a very crude upper bound, it gives a sense of the influence of the non-resident worker exodus on the jobless rate.

The borders are not open yet. But they soon will be, once the forthcoming election is finished which will roughly coincide with herd immunity via vaccines. The election is shaping as a demoralising contest of The Rapists versus The Traitors. But what matters to this discussion is that both remain committed to 200k per annum mass immigration. There are some nuances around the visa system but not enough to make a difference.

We have just run a decade-long experiment in what this does to the economy and the evidence points conclusively to it being immensely deflationary for everything except house prices.

This brings me to point two. Interest rates will not be used to curb house prices, either. That job belongs to macroprudential now and the moves are already afoot. The RBA noted last week it is readying new tools:

“The Council of Financial Regulators meeting last week that I chaired, we had a discussion about what might be the appropriate options to employ if housing credit growth accelerated and was outstripping growth in incomes. Because I don’t think it’s in the country’s interest to have an extended period where credit growth is running way ahead of growth in our incomes, particularly given the high levels of debt.

“So, we’ve worked through together with APRA what the options would be there and they include: debt-to-income ratios; loan-to-value ratios; and the type of restrictions we saw a few years ago on investor and interest-only lending as well.

“We are not at the point where we’re actively considering implementing any initiatives in this area. But we’re doing the preparation of what might happen, what we might do if credit growth was accelerating…

“[But] we’ve got some way to go before something like that was going to happen”.

APRA also wrote to top banks last week to prepare them:

…to seek assurances they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders’ risk appetites.

CBA then hiked its floor rate for repayment assessments to 5.25% from 5.1%.

Most importantly, the house price mad Morrison Government has already capitulated.  Treasurer Josh Frydenberg conceded he has discussed soaring house prices with regulators:

“It’s a good thing when the price of their home goes up, [it] gives them more confidence to consume, gives many small business who mortgage their home [the chance] to invest in their businesses. Overall it’s a good thing for the economy when house prices go up as opposed to going down.

“We do need to monitor prices, we need to ensure it’s not over-heating and that is what APRA and the RBA are doing,” he said.

“I think it is important to monitor it closely and to ensure that we can continue to keep the focus on owner-occupiers because that’s what we’d like to see coming into the market.”

There you have it. Investors are about to be cut off at the knees. When they are, house prices will slow materially and so will consumption. If not there’ll be more MP to come.

Finally, why do it this way at all? Why not just use interest rates? That comes down to point three.

Contrary to popular thinking, China is not Australia’s saviour this time around. It is our imminent doom. Both in cyclical and structural terms, Australian income is now at the peak of an extraordinary income boom that is going to implode over the next few years.

Cyclically, China is swiflty tightening its credit flows into its construction sectors. Over the next year, this is going to halve iron ore and coal prices.

Structurally, Cold War 2.0 means China will now do everything in its power to rid itself of its Australian iron ore dependence. In the latest five-year plan it intends to lift its scrap output to 30% by 2025. Assuming steel output remains stable, that will remove the need for 150mt of seaborne iron ore demand. And steel output is more likely to fall for long periods as well. That means iron ore and coal keep on falling back to $60, then below.

Moreover, this will expose the scarring of the wider Chinese trade war upon Australia which will include no return of either students or tourists when borders reopen.

In short, Australia has a long external adjustment ahead of it as export income falls interminably, landing on nominal growth, the budget, wages and inflation.

So, there you have it. The three horsemen of Australian economic restructuring: immigration, macroprudential and Chinese decoupling.

All will require lower for longer interest rates, probably negative in a few years, to drive a much lower Australian dollar.

Houses and Holes
Latest posts by Houses and Holes (see all)

Comments

  1. If China does as you say, won that on its own tank the $A. Especially if the rest of the world opens up and limited pfizer supplies result in a longer than expected period to achieve herd immunity and open borders here. The lower dollar would mean all domestic goods imported will rise. Wont the RBA then have to either keep IR steady or increase it with the resulting CPI increases as a result.

    • Jumping jack flash

      Its all relative.
      All countries simultaneously inflating, as i expected. The US did it right, and maybe their effort is enough to compensate for the rest of the world.

      If they can get CPI high enough IR cuts wont be necessary, in fact if CPI hits 6% or more then wages should rise a few % and then IR can safely rise a little without destroying everything.

      CPI is being sold as transitory and temporary so i guess it makes sense that the direction is that IRs will be squeezed. I believe they are lying about inflation, and they know it. They dont want IR to rise prematurely before wages can start inflating.

  2. MathiasMEMBER

    Yep… down she goes.

    I’ve been thinking about DXY. I believe Im wrong. My original thought ( based on the evil technical analysis which I know MB hates lol ) was for DXY at 97 or so… now Im reading news and all kinds of stuff, I think my opinions changed. I think my DXY flag triangle thing has been totally blown out of the water.
    https://gyazo.com/a4d7984f42abf4543147edb386d89998?token=8cf9f1178a9c060bb787d26223379a67

    Now Im predicting DXY for 109.

    So, I was thinking about whats going to stop DXY going even further ( the non-economist I am ). At some point, US will start jacking interest rates. My feeling is with crushed global currencys forced down due to rising DXY, that’ll see money flows chasing yield into USD. Furthermore, generally speaking, rising interest rates is seen as Currency Positive. While it might influence stocks and real estate in negative ways, Im thinking rising interest rates wont do much to hamper DXY rise.

    So therefore, Im thinking, DXY to 109… at least… and potentially, even higher.

    When I draw up my charts for EURUSD, GBPUSD, AUDUSD, NZDUSD and how far a DXY of 109 pushes those currencys down, Im like… woah… thats going to get real interesting.

    Yeah, I mean… news… Chinese spy Dong Jingwei ‘defects to the West while offering covid secrets’
    https://www.news.com.au/world/coronavirus/chinese-spy-dong-jingwei-defects-to-the-west-while-offering-covid-secrets/news-story/d61277b586d043c6942bcce7b8b70d44

    So US has evidence of Wuhan Covid Breach. Next step is to declare compensation from China ( of which we all know they’ll give US the finger and tell them to get stuffed ). So US then has a decision to make. Either a) Do nothing or b) Rally the troops for war. Either way, Im thinking thats DXY positive into the hellosphere.

    Im no expert economist but like… If China refuses to pay compensation yeah, there are always sanctions I suppose. I dunno. From how it looks to me, this could get ugly in a hurry.

    One thing I do know, is I love Forex and sounds like Im going to have the best 2 years ha ha. I’ve never been so happy to be a Forex Trader lol.

    • boomengineeringMEMBER

      Very interesting having all these opposing views expressed on same site, spiced up by bcnich’s extreme. All this semds messages to the layman observer is that, knowone knows and to carry on regardless with provisions in place to guard against calamity.

      • With so much uncertainty, only the laws of nature can be relied on….with one of those being that Sydney house prices only ever go up.

      • Goldstandard1MEMBER

        Knowing, of course, that whatever the result some ppl are absolutely travelling in the wrong direction. This is why I get stuck in the middle a bit, but never being caught nude as the tide goes out….sure miss some upside a long the way but sleeping at night calmly is underated these days.

    • MountainGuinMEMBER

      I’m not sure that the USA could call for compensation from China as they helped to fund work at the lab. So a call for compo by the USA could trigger calls for both the USA and China to pay the rest of us compensation.
      I’m not expecting any accountability

      • ErmingtonPlumbingMEMBER

        Its not Compensation OR war but a narrative for something in between.
        Its clearly time for “the west” to decouple from China.
        This of course will mean pain for many of the wests biggest and most treasonous Corporations.
        Their resistance to this decoupling will be as robust as Chinas.

  3. The Traveling Wilbur

    If only China currently exported soup to Australia then the punchline could write itself.

    Oh. Wait…

  4. MPLOL

    If you’re going to use history as a guide, when have we introduced MP that meaningfully impacted prices over the long term?

      • Jumping jack flash

        Lol, suppressing CPI is not what they need to do now.

        Arguably they haven’t needed to do it for a decade, but we have imbeciles in charge who dont know how to think, much less know how to think up doing something different than what has been done before – back when our leaders still knew how to think.

  5. C'est de la folieMEMBER

    I couldn’t speak for everyone but I have this morning been forced to QR simply to get into my workplace – to achieve an outcome that can be achieved at any time simply by looking at the coordinates from the mobile phone towers.  Exactly the same emergency powers which enable lockdowns, give out fines, close premises etc are those which enable that geolocation.  To me the whole handling of this pandemic seems increasingly designed simply to piss people off, waste their time, and get them to ‘agree’ to something the state is already assuming is its right……They will start asking people working from home to start QRing there next – and tell us it is essential for public safety.

    We still have 35 thousand Australians locked out of the country.  Despite this more than half of the people who have been allowed in over the last year have NOT been citizens.  We have seen the economic response tailored to spoon feed budget funding to the wealthiest and more prepared to structure their finances to access government largesse, while the poorer and more precarious are being fobbed off with smaller amounts, short term casual employment, rapidly rising rents, spiralling house prices, and an endless parade of utter bull from our ‘elites’.  These still oversee an economy which is a bubble cocooned around syphoning off government redistribution from mainly iron ore proceeds made possible by a buyer which has been revealed over the last year as a fairly overt strategic enemy, which treats Australian expectations (palsied as they are) vis information, probity, and veracity with utter contempt. There is an election within a year between a reviled government and an opposition which seemingly has buried its thinking capacity within its own organisational backside.  There is a very sizeable chunk of the Australian workforce directly reliant on short term government contracting for their employment which they will assume (plausibly so) will be turned off the moment a government has enough of a majority to feel electorally ‘safe’.  Beyond that Australia has an exposed sector of the economy smaller than smaller than the schlong of an ice swimmer who sees an orca in the water.

    Of course rates are going down.  It is a race to the bottom.  But rates aren’t the only thing going down.  This country’s entire ‘leadership’ credentials are going down with it – the politicians, the corporate managements, and those exhorting from the sidelines.  Don’t read the papers, go to your nearest shopping centre – how many dead and empty premises are there?  Head off to your nearest University and catch a listen to the birds chirping.  Those rates going down are the last rounds of the battleship neoliberalism as it slides beneath the waves.  That of course is the positive spin.  If we get a worse outcomes – still eminently possible – we should be considering what happens if some variant of the virus wrong foots our cloth headed health managers, with a population cultivated to suspect every vaccine, and not that many emergency beds in the country.  If it happened in the middle of an election campaign itcould see either sides utterly roasted alive.  An AUD with a 0.4 in front of it is still a live option here

    • working class hamMEMBER

      Can’t really argue against any of those points.
      Especially the downward looking economy and “nuisance” lockdown procedures, conveniently introduced at school holidays and long weekends.

  6. I'll have anotherMEMBER

    “steel output is more likely to fall for long periods as well”

    Maybe, not sure of the supply / demand influence on the futures but they are up over $1k into 2022 currently.

    Goldman Sachs had a recent article in Bloomberg saying China’s influence on commodities, steel and copper included is not what it was and the commodity super cycle is far from over.

    • That was the worst commodities argument I have seen. It’s called ringing the bell at the top. Given it is Goldman I can only wonder if they need to offload a few positions to some retail patsies.

  7. The scary thing about the last GDP figures was the 5% increase in housing which offset a 1% decline in all other building sectors. This is the whole of the increase in GDP for the quarter.
    With the withdrawal of the housing stimulus over the next few quarters, we will see negative GDP numbers shortly, probably the December quarter. Maybe even September.
    Expect the election no later than October.

  8. Bold call. If this plays out you will certainly be the first to have called it. Biggest risk in my mind is fiscal – If the RBA can convince whoever is in government to ignore the terms of trade and boost spending backed by QE. Labor would be the most likely, but I’m not sure they have fully embraced the MMT mindset yet? Not sure.

  9. BradleyMEMBER

    I think for many different reasons, the vaccine uptake will be slower than required to get the borders fully open again. I am not getting a jab yet, particularly the AZ one which has been allocated to my age group. I am seeing the hesitancy everywhere and I encourage it. If we struggle to get to 60% vaccinated, the pressure to keep borders closed and wage/job thieves out remains. Anarchy through inaction is much easier than the other ways.

    • You obviously believe that the election will be next year. It won’t matter who wins, the borders will be wide open post election. If the election happens this year and you are not vaccinated, you will be Hrdlicka’s collateral damage.

      • BradleyMEMBER

        No risk equals no reward and I am prepared for the risk, especially as i live regional. I doubt the borders will be open any time before Gladys’s 80% target of vaccination are reached and the anti vax clowns, the confused and the just plain worried are all helping slow down the race to reopening.

        • Are we talking the same Gladys that wants international students and ‘skilled migrants’ back? The elite is absolutely determined to get the borders wide open. Notice the constant coverage by the media that Australia is being left behind whatever that means. Like yourself I am happy with the borders closed, but faced into reality that borders will be opened sooner than they tell us and most likely post election.

          • BradleyMEMBER

            Resistance to the vaccine roll out is then our best chance of slowing the reopening then. Here in National Party territory, almost every boomer is reluctant for AZ. My reasons are different to theirs but if the roll out remains sluggish, the result is what counts.

        • Doing my bit to keep borders shut. No jab / shot for myself or the 20 odd blokes I work with. Except for the obvious sons of Mary the rest reckon it’s a con $ piracy of sorts but all muddled on the origin or point of it all.

          No mask ever, I ignore QR & sign in requirements everywhere, declined politely to show ID at regional sports store to prove from region. Herd immunity is for cows and half wits. I am not an animal. Could care less if borders open..preferably not:) Don’t care for house prices fall and curious to see how folk cope if/when it falls down around their ears…especially those committed to prestige Euro cars and cafe kulcha:))

  10. Jumping jack flash

    Agree! Its either interest rate cuts, or their equivalent monetary and fiscal shenanigans, or rampant CPI.

    All are linked together, especially CPI and wages growth in this kind of debt economy that we have.

    Scomo missed the boat on using the stimulus correctly to heal the economy so now at best we get some “crumbs” from the US’ stellar effort.

    If we dont get the CPI we need then of course they will cut interest rates or look for equivalent measures. What else is there? The bcnich scenario?

    The debt must grow to pay the debt’s interest. It is really very simple.

      • Jumping jack flash

        His scenario is one scenario that certainly could coccur if the interest on the debt cant be paid. I personally think they will go as far as majick up the interest payments to appease the banks.

        Banks are essentially simple creatures.

      • Tez of course I could be wrong
        But I’ll say one thing

        On here ……I said when the US 10 year was 1.75% and US 30 year was 2.50%
        I said we would see 10 year at btw 1 and 1.20 and 30 year under 2%
        10 is around 1.40 and 30 year under 2% today
        At the time I actually said that the market was the most ever short bonds and most bearish bonds nearly ever & it was close to impossible we wouldn’t have a correction
        Even MB was calling 2.25% when we were at 1.75% US 10 year

        At 1.80% AUST 10 year I said we would head towards 1%

        This is just a counter trend fall in yields before they rise in H2

        Think maybe another 10 or so basis points down in the 30, maybe 1.85 give or take and another 20/30 basis points down before 10 year heads to 3% 30 year 3.50% later this year

        I just wanted to make one point how markets tend to react ….. market is always most bearish at the low and most bullish at the high….no idea why that is

        Think people feel comfortable together, most don’t like running outside the pack

  11. Rates are going to be cut, but not the headline rate. First thing that will happen is that the TFF will become permanent which is a rate cut by stealth.

    • Jumping jack flash

      Correct! TFF is but one method of simulating a rate cut when you’re not having a rate cut.

  12. If we see a recovery in the USA and other countries in 2022-3, wouldn’t the RBA be forced to raise rates in order to prevent capital flight from Australia?

  13. ErmingtonPlumbingMEMBER

    “the wider Chinese trade war upon Australia which will include no return of either students or tourists when borders reopen”

    From a Cold war 2.0 perspective I see the logic of China turning of the tourism tap to punish us economically but the student/migration pathway of Chinese nationals into this country is a definite soft power win for them.
    Conquest through Colonialization has got a long and proven history.

    • Fishing72MEMBER

      Agree. The students and immigrants aren’t stopping. Also read something the other day that claimed Indian and Nepalese student interest in Australian Universities has dropped off, whilst Chinese student interest is climbing. The CCP punishes Australia as a sideshow, the main came is gaining control.

  14. @dylan
    Just responding to your message that you are feeling things are eerie and you are loading up BB
    is BB that BBOZ??

    You are all saying the same thing …. ominous crash policy error
    Look at iron ore
    DXY has surged and it’s still a few dollars off the highs

    This is really a very dangerous crossroad in the market

    Everyone has turned pretty bearish

    This is when you can see violent reversals … that is moves up in commodities equities etc AUD too

    If this plays out the move to 90c could be very quick

    Well you are all on one side now, and you maybe right but if you are wrong you’ll be very wrong not a little wrong

    This could turn very violent to the upside

  15. reusachtigeMEMBER

    I’m looking forward to the extra boom times in housing when the rates go lower!

    • Reusa
      I think there will be a small decrease not much lower in rates and maybe one more mini boom into sept but I disagree they’ll stay low
      Think this is just a counter trend lower yields from the move from 0.40 to 1.75 US 10
      Year ….1.10/25 before much higher … 3% AUSSIE 10 year in H2
      Think you’ll find bond yields and home loan rates much higher in the latter part of the year

      Like BOOM says it’s great there are many opposing views

      Very interesting and uncertain times just ahead

  16. So given the contra signal that is MB with their continuous calls for MP that never happens, I am going to assume that rates are going up!

  17. “We have seen the economic response tailored to spoon feed budget funding to the wealthiest and more prepared to structure their finances to access government largesse, while the poorer and more precarious are being fobbed off with smaller amounts…”
    Can you let me know what this means? The wife and I are well into top 1% of income earner territory but haven’t managed to snare a cracker from the hundreds of billions in cash raining down.
    Not even free childcare as our local centre managed to have messed up its paperwork years ago when it was founded and discovered it was ineligible to offer free childcare.
    Please tell me what I missed out on but was eligible for.

    • All you needed to be was a business registered for GST and apparently money was raining down.
      Not for the PAYG plebs though, that scum is unworthy…

      Edit: and I don’t think it even needed to meet any turnover threshold.

  18. US 10 and 30 year yields collapsing……bond short squeeze, stop losses
    Everyone was caught on the same side of the boat

    You watch all the ones that said we would go to 2.50% on US 10 year when it was 1.75% will say at 1.10 to 1.20% on US 10 year we are going to 0,50%

    It’ll be the same people

    Always is

    10 year will most likely get to their 2.50% but when they are saying it’ll get to 0,50%

    They will be right, it’ll get to 2.5% but they’ll be long bonds not short bonds

  19. I think what you are missing is, neither Scotty nor also controls the border, the weakest state premier does or Gladys does.

  20. I, for one, look forward to official Banana Republic status now that I’ve got chimpanzee adenovirus coursing through my veins.