Are cuts back on the table?

RBA watcher James Glynn pushed the Aussie dollar and bond yields down on Friday with the explosive story RBA not ruling out rate cut.  This impacted the market as hikes are priced for 2018 and consensus has it that Gov Lowe has basically ruled out further reductions.

I myself think that he would be happy to retire with the cash rate unchanged at 1.5% … and think that this cut stuff is mostly bluster.  However it does bear thinking carefully about what Harper meant.  The key bit is below:

A slump in Australian retail sales in July and August is no cause for immediate alarm, but a response through interest rates could be warranted if consumption across the economy loses momentum entirely, according to Reserve Bank board member Ian Harper.

So why would the RBA worry about a broad based slowdown of consumption?

Because spending has been growing faster than income.  With wealth flattered by house price gains, households have saved less and spent more.  Reflecting this, the household savings rate has fallen over 500bps in the past five years.

With the housing market now flattening out, the risk is that the household savings rate starts to rise once again.  if this were to occur consumption growth would slow below the tepid pace of income growth.  That would be an environment characterized by slow growth and weak firm pricing power.

There is no way the RBA can hit their target of 2.5% inflation in that economy.

Would this be sufficient to get Gov Lowe to cut? i doubt it.

but i certainly do not see the RBA tightening in 2018. The market is priced for the first hike in Q3 2018. That seems about a year too early to me!

Posted in AUD, RBA, Uncategorized | 6 Comments

RBA goes the full pom-pom

[is this thing still on?]

It’s been a long time since I blogged, but today’s RBA statement has lit a modest fire …

Before I riff on what’s wrong with the Bank, let me put down some context. The Bank’s main job is to keep inflation at 2.5%, with a control range of 2% to 3%.

At present, inflation is both below the 2.5% target and below the 2% to 3% control range; and it is not expected to get back inside the control range until some time in late 2019.  The chart below is from the RBA’s Q2 SOMP, and it captures their failure … sorry boss, i’m missing my target and i don’t know when i’m going to hit it.  Given the gentle up-slope of their CPI forecast, i would say the central case is a return to 2.5% inflation around 2025 …

core CPI

Given that the NAIRU is probably 5% and that we’re around 5.75% just now, monetary policy should be easy: it’s either on hold with an easing bias, or cutting, right?

Well that’s so pre-GFC.  RBA Gov Dr Lowe was an early contributor to the financial stability literature, writing papers in his time at the BIS (with Borio) which encouraged central bankers to take a different view:

central banks should consider paying greater attention to credit in their monetary policy strategies than is generally the case at present. Specifically, simply setting monetary policy so that a two-year inflation forecast is at the central bank’s target may, on occasions, be less than optimal.

Gov Lowe and Assistant Gov Kent even wrote a paper together in 1998.

So rate cuts are not on, given the highly-leveraged Aussie household balance sheet and the recently rapid appreciation of house prices.  That’s a bit inconvenient given the yawning gap to the inflation target and the troubling state of the labour market (at best mixed, probably trend loosening) and the still-bleak capex outlook.

So what to do? Cheer-lead.

GDP downgrade? No problem, it’s still going back to 3.25% … 3.25% is like the horizon, always the same distance away …

Remember how they dropped 100bps of GDP when Q3 GDP unexpectedly contracted due to ‘temporary factors’?

And today they downgraded Q1 GDP in their words.

But it’s all no problem, because it’s going back to 3.25% in a few years time, right?

What’s the point of being downbeat? They have already decided that they cannot cut, so they might as well tell business that the medium term outlook is okay.  Perhaps it’ll boost business investment and help to solve their problems?

It’s not working so far.  The ABS Q1 Capex report was bleak.  After making all the nerdy adjustments it suggests that investment is going to crash by 10% in 2017/18 — this means that the RBA’s growth forecasts are about 100bps too strong.

What does the RBA say?

the transition to lower levels of mining investment following the mining investment boom is almost complete. Business conditions have improved and capacity utilisation has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment.

Well maybe … except that firms told the ABS that they plan to spend less in 2017/18 than they did in 2016/17.

I suppose that there’s no point talking about it unless you are going to do something about it … might as well get out the pop-poms and cheer-lead.

I’m clever, I’m cute! MIT was a hoot!
PHD and neat hair! Central banking isn’t fair!
I’m smart and you’re not! your housing is too hot!
Macro-pru is so cool! I dominate the fools!
inflation? a mess! return to target is a guess!
invest please? I smile … i know you think i’m vile.
I could help but … i won’t … after 1.5% there’s a moat.
so invest please, I roar! I swear I’m not a whore!
We cheer and we lead! We act like we’re on speed!
Don’t hate us cause we’re beautiful well we don’t like u either!
Posted in AUD, RBA | 6 Comments

RBA sets up for a cut …

The RBA has set things up to resume the easing cycle that began in 2011 (I never believed in the whole ‘neutral’ thing … see here).  My current view is that the RBA will cut by 50bps in 2015, taking their policy rate to a fresh low of 2% by mid year.

The most likely quarter for the cuts is Q2 – which is long enough to see the impact of the falling terms of trade in the data.

Continue reading

Posted in AUD, monetary policy, RBA | Tagged , | 56 Comments

When +50k is -5k (maybe)

Getting right to the point,  my view is that the Feb 2014 jobs report is bunkum.  The survey is not designed to measure the number of jobs, and if you use a household survey for this purpose you are going to get stupid results some of the time … this is one of those times. After accounting for the silliness, the number of jobs added in Feb 2014 seems more likely to be -5k, rather than +47.3k.

We’ve seen this before — just last year in the Feb 2013 Jobs report.  Check it out, and you’ll remember the prior ‘turning point’ in the labour market – the +71.5k jobs was evidence that all the prior reports were bunkum, that the labour market was responding to lower rates, and that rate cuts were over ….

Screen Shot 2014-03-14 at 6.10.44 AM

Except that it wasn’t … it was a bug due to sample rotation and bad seasonal factors, and not only did the RBA cut in May and August, but the number has since been revised down to a more sociable +26.6k.

Yesterday’s report had the same problems – and the ABS (again) made a statement reporting that there was an issue with sample rotation.


Anyhow, it’s worth reviewing the data in any case, because the new seasonal factors change the story a little.  First, note the slightly better performance of the labour market over the last few months.  This now seems more consistent with GDP and business surveys.


Regular readers will know i dislike the jobs numbers in part as i do not trust the population benchmarks – the right way to get around that is to look at how the proportion of the population in work is changing. Even after seasonal reanalysis the employment share remains weak (excepting Feb).


Reflecting this, the unemployment rates continue to trend up.  Another odd feature of the new data is the spike in female unemployment. It looks like this is tied up with the sample issues (they produced a spike in employment, full time employment, and participation).  The unemployment rate rose 5bps to be just a whisker under 6.05% — so we almost printed a 6.1% on the screens.


The higher participation rate (more people looking for work) hid in part the higher employment estimate.  The employment to population ratio exposes this clearly – it’s a small uptick (and it might not be real), but there’s still ample slack in the labour market.

My bottom line on this report is that it’s a bit of a joke.  The trends are consistent with an economy that’s responding to lower rates as you would expect – but it’s still not clear if that’s going to be enough given the headwinds that are blowing from resource investment, fiscal policy and (potentially) slower Chinese growth.

Posted in AUD, economics | Tagged , | 13 Comments


The 0.8%q/q GDP print looked pretty good at the headline level, and the 2.75%y/y (v. RBA at 2.5%y/y) looked even better – but when you dig a little deeper that is where the good news ends.


Over the last two quarters, there has been a nice increase in consumption, however this has been offset by slowing investment – and with the outlook for further declines of investment and slower growth in Government spending, consumption will need to keep firm (or net exports will have to keep booming) to keep overall GDP growth around 3%yoy.


The RBA cannot do much about net exports (reflecting the fact that they have only limited influence over the currency), so they tend to steer policy based on measures on domestic activity. The simplest regression analysis reveals that GNE (DD + Inv) is much more important for policy – and on this measure we remain near recession.


Sure things looked a little better the last two quarters, however we remain a long way from normal.

I know a lot of readers are interested in nominal GDP – and here the news is a it better – due to a (probably temporary) rise in the terms of trade. It’s up on the quarter, and down only a small amount on the year (note that the YoY % decline was similar to the GFC).

This has boosted nominal GDP a little – though the pace of growth remains weak by historical comparisons.


Myself, i prefer read GDI ahead of n-gdp, as it’s less influenced by inflation.


Again, this measure shows some improvement, but it’s a long way below normal.

Finally, thinking about policy – with the outlook for further declines in the terms of trade, it’s hard to see nominal GDP (or related measures) holding up. And with the bits of the economy the RBA most directly controls (domestic demand and GNE) still very weak, it’s premature to say anything more than that the data remains consistent with ultra-easy policy.

I still think the RBA’s next move is back to an easing bias.

Posted in AUD, economics, monetary policy, RBA | Tagged | 4 Comments

Aussie labour market plumbs new lows (Jan’14 report)

The Jan 2014 labour market report was BAD.


The unemployment rate rose to 6% — exceeding the GFC peak — as the ranks of unemployed women rose (female employment had been relatively stable). Continue reading

Posted in AUD, economics, RBA | Tagged , | 13 Comments

IMF worries about mining bust, says AUD still 5% to 10% rich

Regardless of what you think of the institution, the IMF’s article IV consultation reports are useful as a source of information (and in particular for a summary of what the ‘official family’ is thinking).

The Fund‘s 2013 Australia report reveals that staff think the AUD remains over-valued …

Despite some recent depreciation the real exchange rate, currently in the range of 89 cents to the U.S. dollar, is 5-10 percent above the level predicted by Australia-specific factors from a medium-term perspective

… and that the official family agree …

Like staff, they expressed some surprise during consultations that the exchange rate had remained high despite the decline in the terms of trade, although it has depreciated more recently. Going forward, a lower level of the exchange rate would help balance growth in the economy. Continue reading

Posted in AUD, economics | Tagged , | 5 Comments

not so hawkish (Q1’14 RBA SOMP)

Finding what you expect is a common failing of human beings — however I doubt it is wishful thinking that’s got me finding confirmation of my expectations in the RBA’s Q1’14 SOMP.

Screen Shot 2014-02-08 at 4.26.41 PM

As ever, the place to start with is the last page. Assuming the cash rate is unchanged at 2.5% until mid 2016, that the nominal AUD is steady at 89c (v the USD or a TWI of 69), and that the price of (Brent) Crude Oil is stable at USD104/bbl, the RBA expects that growth will be sub-trend until mid-2015, and that inflation will return to 2.5% over the projection period. Continue reading

Posted in AUD, economics, monetary policy, RBA | Tagged | 14 Comments

Is the RBA really neutral?

A funny thing happened yesterday. It was not the RBA dropping their easing bias — which was fairly obvious given the Q4’13 inflation surprise — but the way the market traded on the news.

To see why this was odd, we need to rewind so as to give context to market pricing before the statement was released.

Screen Shot 2014-02-04 at 5.01.44 PM

The above charts (from the Q4 SOMP) summarise the situation following the November RBA meeting: their central forecast was for growth to remain below potential (which is thought to be about 3%yoy) until mid 2015. As a result of this weak growth outlook inflation was expected to be around or below the 2.5% target for the entire projection period (the tick up and down mostly reflected the pass-through of a lower exchange rate to prices).

Continue reading

Posted in AUD, monetary policy, RBA | Tagged | 20 Comments

2013 in review

The stats helper monkeys prepared a 2013 annual report for this blog.

Here’s an excerpt:

The concert hall at the Sydney Opera House holds 2,700 people. This blog was viewed about 58,000 times in 2013. If it were a concert at Sydney Opera House, it would take about 21 sold-out performances for that many people to see it.

Click here to see the complete report.

Posted in Uncategorized | 4 Comments