I am very late to the December meeting debate, save for my observation following the Nov meeting (which i got wrong by calling a cut) that the RBA’s story had not changed.
If anything, their problem — well our economic problem — looks worse after the last week of data.
It now looks like mining investment as a share of GDP will peak nearer to 7%, which is a 100bps drop from expectations following the Q4 SOMP, and a 200bps drop from expectations earlier in the year. Sure, half of this is imports, but that’s 100bps of GDP that something has to replace, and it’s not clear what that something is going to be.
In the NAB business and ABS Capex surveys the non-mining sector remains characterised by low confidence and excess capacity. You’d expect, low confidence and excess capacity is associated with a disinclination to invest, and that is what firms are telling the NAB.
The ABS incomes data we have for Q3 shows that firms aren’t making much money (economy-wide profits peaked in Q3’11, and fell another 3% last quarter). So while their debt and equity cost of capital has been falling, their return on capital has also been falling — which means it’s not clear that policy is all that stimulatory.
The partial data we have for Q4 suggests that things are slowing further. Retail sales for October were flat, the 6mma AR has slowed back to ~3.5%y/y pace, and once food is taken out (where price effects may be inflating nominal values) retail sales growth is a meagre ~1.5% AR (again, i use the 6mma).
Credit growth is flattening out once again, with housing remaining depressed, business pulling back, and personal credit picking up — this fits neatly with the low business confidence data we have seen (so firms do not borrow) and the weakness in hours worked (which will tend to cause a short term increase in credit usage, as folks smooth down to their new lower level of income).
Finally, the few bits of data we have for November suggest ongoing weakness. There has been a further decline in all of the measures of job ads (SEEK online ads, the DEWR govt count once you adjust for the day-count, and the ANZ measures), and the AIG Manu PMI fell back to 43.6pts, making for the 9th month of contraction of the sector. This suggests further weakness in the — already weak — NAB business survey for November.
So when the RBA meets today, I would think that the only thing stopping them from cutting by 50bps would be their inflation fears — which i think are misplaced. The wages data has helped a bit with those fears, and the 0.5%qq core print i expect for Q4 should help some more.
If they cut by 50bps, floating rate mortgages are likely to see 35bps to 40bps of reduction, so it’d be a cut and a half ahead of a two month break. Unlikely, but a better call than 0bps, as the economy clearly needs support.
I do think the RBA (well, at least the staff) seem uncomfortable with the inflation outlook — that’s what the Q4 SOMP was all about — so a 50bps cut seems unlikely, but given the economic weakness those fears must have abated somewhat.
Finally, i don’t make anything much of the McCrann “That’s all Folks” article that’s floating about — i tried to find a link, but was unable. A key reason is that he published an article with the same name following the 2011 November RBA meeting, and of course the RBA cut another 25bps at the very next (December 2011) meeting.
Terry may well be correct — it could be the RBA’s last cut — but i doubt it. When job ads stabilise, business surveys get back toward average levels, and the uptrend in the unemployment rate flattens out, the easing cycle will be over. Right now, the mining investment boom hasn’t even rolled over … it’s much to soon to be calling the end of the easing cycle.
I am sticking to my view that the cash rate ends up around 2% — which will put mortgages around 5%