McCrann riffs on Yellen

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The Sun’s Terry McCrann has published a great column on the nomination of Yellen and what it might mean for the AUD. The AUD bottomed in early August at ~89c, and has rallied back to ~94c due to the fed’s easier stance, the improvement in Chinese data, and the post election confidence pop.

Given the amount of pessimism out there regarding the AUD, it seems possible that it will break above 95c on nothing more than positioning (grinding out the haters). The move so far has been broadly in keeping with a recovery of AUD commodity prices, but another 5c higher, as McCrann contemplates, would constitute an unwelcome tightening of financial conditions, and may well undo the post-election elation we’ve seen.

In that case, it seems unlikely that 1.00 for the AUD and 2.5% for the cash rate would stabilise the unemployment rate and keep inflation around 2.5%.

McCrann says it is too early to think about a November cut, and i think he’s right – but if monetary conditions tighten, confidence slips, and house price appreciation slows (it may merely be a reset higher in price due to lower rates), it’s easy to see another cut in Q1’14.

Regardless of if 2.5% is the cash rate low, i think it’ll be a long time before we see cash rate above 2.5% (earliest hike looks like 2015 just now).

The RBA would have to contemplate whether than mix is sufficiently positive for the economy that it overrides the negative impact of a dollar at or near parity.

But if not, if unemployment heads back over 6 per cent, it would grit its collective board teeth and cut its official rate.

It doesn’t want to cut further. It does not want to further hit savers, nor provide more fuel for property buying.

But it will if it has to; and a broad brush, a dollar at parity, it would probably have to.

It would also then likely contemplate imposing quantitative restrictions on home lending. Like a minimum deposit requirement.


    1. Yep, and TM mentions those. I don’t think the RBA is keen on explicit MP, but they can work via APRA to do a lot to influence lending standards. Of course, take it to the limit and they would back explicit MP, but i think that is a few cuts away.

  1. I’m still not convinced that easier US mon pol is contractionary for us, on balance, even if it means a higher AUD. Look at the ASX200 on September 16 when Summers pulled out. That said, another cut in Nov/Dec or 1Q14 wouldn’t be a bad idea. At the least, it would make Koukie have to backtrack a second time…

    1. I think it depends on what sector you are in, but concede that it is not straight-forward.

      i don’t get why SK is going so hard on hikes … With fiscal policy to tighten and mining investment to fall, hikes seem at least a year away, probably more.

      1. My theory is that most financial market economists and commentators are based in Sydney, which has experienced the strongest house price rises, mind you after 10 years of little real increase. The rest of Australia has been much quieter.

    2. Shares (worldwide) now need more earning growth (better GDP growth so less QE) or more QE to go higher from here. Status quo no longer enough. Why are they going on with QE as is at all since no longer delivering low rates? Stop it or increase it!

  2. With no tapering for longer (higher AUD) and same weak credit growth here in Australia (housing prices are a one off reset to lower rates) then lower rates are more likely than not.

  3. Bill Mitchell :

    “Over the last six months, full-time employment has risen by 8.9 thousand jobs (net) while part-time work has risen by 22.6 thousand jobs.

    The Working Age Population has risen by 147 thousand in the same period while the labour force has risen by just 38.6 thousand. The labour force growth is tepid (relative to the growth in the WAP) because participation has fallen substantially.

    The weak employment growth has thus not been able to keep pace with the underlying population growth and unemployment has risen as a result (by 7 thousand).”

    Working Age Population up 147k, jobs only up 30k ….

    Who’s buying all the houses?

      1. Yes… and with interest only – 80% LVR – they are actually not paying for the asset, just leveraging at 5x. When will they start repaying the principal, when rates go up? Or do they all plan to sell when prices go up? The miracle of the seven loaves and fishes. It actually makes my shares look like a safe bet. At least I can get out fast.

          1. Yeah, I worked out that if you’re on a high marginal tax rate, the breakeven nominal capital gain under such an arrangement is only just over 3% pa, with plenty of upside gain when you’re looking at 5-7%. Plus no margin calls!

          2. That’s the key with property – so long as you remain able to pay the mortgage, the absence of margin calls means you can leverage and await the k-pop.

          3. Rajat, is your calculation for a negative or a positively geared property net of expenses? It’s easier now to positively gear a property with low rates indeed even if rent yields are always quite low.

            If first home buyer keep staying out of the market, investors will have used all of their existing equity by next year. Remenber total credit growth is still growing but not much at all. Actually are investors using up all the available credit?

            Looks like an easy one-way bet that worked so well in the past, doesn’t it? Then it’s not. And it’s too crowded.

          4. Ricardo, 100% LVR using equity from an existing investment, interest only? Pure money printing. No worries, I am sure the RBA and APRA have this under control……….. in the meantime buy bank shares , and stand ready to get out fast.

          5. ssec, my calc is for negatively-geared properties on the basis that they offer better prospects for capital gain (eg small established houses in the inner/middle city rather than new or old apartments which tend to have higher yields).
            For example, assuming 100% borrowed:
            * 6% interest (less at the moment)
            * 3% gross yield, about 2.5% net (I’m talking Melbourne)
            * 3.5% loss, deducted at say 40% tax rate, leading to a net loss of 2%
            * plus spread out transactions cost (eg stamp duty, agents’ fees)
            And there you have it – get 3% pa over a 10 year investment and you’re well in the black at current interest rates.

          6. On paper, yep! Problem is when everyone is doing the same investment: at one point we will suddenly find out that we have overbuilt and have excess supply of rentals. That’s how the market goes. And once that happens it will take years to recover. Just imagine the Gold Coast at national level….

      1. Completely irrelevant? Yellen was Bernanke buddy, who’s going to be Yellen’s buddy? For a Bernanke that goes, Fisher and Plosser will start voting in 2014.

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