Is Stevens 80% sure about August?

Posted by

Following the Q2 CPI report, the market is pricing the August meeting at ~80%.


There are decent reasons for this: the unemployment rate continues to trend up, job ads continue to trend down, and the currency still hasn’t fully reflected the weakness in the terms of trade (a level ~85c would be more appropriate).

Still, with so much priced it’s going to be hard for Stevens to meet market expectations today. His most recent speechon economic conditions and prospects can hardly be called hawkish. The thrust of that speech was that the conditions for a pickup are in place, but that the confidence is lacking.

Turning to the current conjuncture, it can be observed, in conventional expenditure accounting terms, that some key areas are well placed to expand once they have the confidence to do so. Non-mining business investment, for example, as a share of GDP has been unusually weak – it is not much above its recession lows of the early 1990s. Many companies, rather than extending themselves, have been financially conservative over recent years and are sitting on very substantial sums of cash. It’s hard to believe that this configuration will not change at some point over the next few years.

Likewise, dwelling investment has been low for an unusually long period, with at least some households intent on reducing debt, thereby strengthening balance sheets. Households have accumulated a good deal of cash as well over recent years. Meanwhile, population growth is quite solid and it has been picking up a bit of late. If anything, we will need to build more dwellings than we have been over recent years. Meanwhile, interest rates are low, dwellings are more ‘affordable’, and finance approvals for housing purchases have risen by 16 per cent over the past year. So there are ‘fundamentals’ that favour a pick-up in these sectors.

Of course, we have to add two things. The first is that no-one can pretend to be able to fine tune this ‘handover’, to guarantee that the non-resources sectors strengthen, on cue, by just the right amount. We have, in fact, had a few handovers over the past five years – from private demand to public in 2009, then to mining investment subsequently. Now we are looking back to household dwelling spending, non-mining investment (and exports). Previous handovers have occurred, largely successfully. That doesn’t guarantee the next one will, though it does mean that we shouldn’t assume that it won’t occur.

The second thing to say is that much depends on ‘confidence’ – that intangible thing that is hard to measure and very hard to increase. We are talking here about confidence that the future will be characterised by growth, that there will be customers for products, that innovations are worth a try, and so on. That confidence seems pretty subdued right now.

So will we get more of the same today? Perhaps.

The risk seems to me to all be in the other direction. The data hasn’t been all that different to what the RBA expected. GDP looks like it’s on track to hit their forecast of ~2.5%y/y for the June quarter (which means that a sub-trend 0.5%q/q looks likely). Both headline and core CPI were closer to 2.5%y/y than the 2.25%y/y that they had forecast in the Q2 SOMP. The point of weakness is in non-farm GDP: where their forecast of 2.75%y/y looks too high by about 1/4 point.

Non-farm GDP is generally a better measure of what’s going on, and a 2.5%y/y result for the year to June seems more in keeping with the weakness in various labour market indicators and various business surveys.

It’s for the latter reasons that i think the RBA will cut their policy rate in August — it’s just that i have a hard time seeing Stevens be much more dovish than he was on 3 July. The RBA will probably cut in August, but i don’t think Gov Stevens will sound 80% sure about it at lunch-time today.


      1. Well, good to see Stevo getting off the fence a bit. If they want to see dwelling investment take over in the next 12-18 months, they need to generate some decent house price inflation before Xmas.

        1. They need more credit growth…. house price inflation is just a consequence… but it’s not happening, people are maxed out and unwilling to get into even more debt.
          In the meantime savers have less money to spend and the rest is using the lower rates to repay their existing debt. Looks like we can’t escape gravity either. And rates are going much lower.

          Plus if you look at the housing recovery so far, it’s booming in a) WA (where we know they are around peak now) and b) NSW (where prices have not boomed since 2003, unlike the other states)

          Click to access 300713-Building_Approvals.pdf

          We just have to plan for a period of lower growth compared to what we were used to.

          1. I disagree. UnN at 5.7% and rising means we can sustain above-trend growth for at least a year or so. The RBA just needs to make the transition happen. By demonstrating they are committed to higher growth, people will take away confidence to spend and you will get your increase in credit growth. There is nothing inevitable about the current sluggish growth in credit, jobs and GDP.

          2. We already had a housing boom, like other countries pre-GFC, but we had no bust. Housing investment will not be enough to replace mining, because if credit is not growing double digit like it used to and will not in the next few years most likely, house prices will not either. Lower and lower rates are hardly a signal that the economy is doing great.

            “There is nothing inevitable about the current sluggish growth in credit, jobs and GDP.” It may not be inevitable but it’s not lower rates that will do the trick IMO (as we have already experienced). The credit boom is a thing of the past, as per Stevens’ speech today. We are now back to “normal”.

  1. The interesting variable is going to be the contribution of mining exports to GDP. But if demand is stable and supply grows, prices will come down and we’ll have more weakness in nominal GDP / ToT.
    What I do not understand is why, since we are expecting a mining “bonanza”, why mining sentiment is so negative right now:

    They are about to get the big returns on the big investment, so why all the negativity? Maybe over-capacity and escalating costs is a larger problem than we think?

    1. Profits are not going to meet expectations, and all but the big fish are getting squeezed by over-capacity in these sectors.

Comments are closed.