This is an updated version of a post one of the team did over at MacroBusiness earlier in the day.
Weak global markets, fears about European defaults, a weakening global economic outlook and business and consumer confidence at home that is very weak have all conspired to fundamentally change the market’s expectations about the course of interest rates in Australia.
Here are a couple of charts which show what the market is now pricing into the interest rate curve followed by a break up of some of the micro-data from the Westpac consumer sentiment survey which highlights the risk to the domestic economy from further household retrenchment.
OIS are “overnight Index Swaps” they are used by traders and the major players in the Australian interest rate markets to bet on the direction of the RBA over the next 12 months. As you can see a month ago the market was pricing flat cash and then an up move now it is unequivocally all about rate cuts regardless of the RBA’s central tendency. 30 day futures are similarly certain that rates are going down.
Also the physical curve in the short end (bank bills – traded by the majors and fund managers) is starting to roll over with 4, 5 and 6 month BBSW dropping below the 3 month rate indicating that there could be more to it than just the offshore panic which is driving futures markets:
As regular readers know we put a lot of stock into the NAB Business Survey and the Westpac – MI Consumer Confidence surveys and these have been telling us for a long time that the economy was in worse shape than the Macro settings in the economy or the mining boom suggested.
So here are some charts to visualize the severity of the falls in today’s consumer sentiment numbers which were down 8.3% to 92.8 and the worst outcome since May 2009.
Firstly,Confidence, Current Conditions and Expectations all fell heavily:
As did confidence in the economy both over the next year and next 5 years:
Family’s view on their own finances was already low but fell a little further:
‘Time to buy a major household item” tanked:
Confidence among Owners and Mortgage Holders slumped while confidence among Renters was up, which is no surprise given house prices are falling:
High income earners’ confidence fell the most but other groups are also weak:
Coming on top of yesterday’s negative NAB Business Survey, it is clear that confidence across the economy is heading south and it would be a brave RBA to hike in this environment, or even to cling to the aggressive rhetoric. We don’t think they will.
Overall the Consumer Confidence data is really weak and had not the RBA been so aggressive in its rhetoric a couple of months ago there would be universal calls for rate cuts. Add in a dose of uncertainty about the state of global markets and the pricing in markets doesn’t seem so outlandish.
Greg McKenna and Team.
greg@lighthousesecurities.com.au
www.twitter.com/gregorymckenna
This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.
If you do need economic, investment or financial advice we are happy to help.
Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au
July 13, 2011 at 4:34 pm
Well, they shouldn’t hike rates — let the mining boom implode by itself. What the RBA should be concentrating on is boosting the rest of our two-speed economy so that when the implosion does occur, at least there will be other industries that can the economy can lean on.
July 13, 2011 at 4:49 pm
Dead right…their adherence to the mining boom as the cure all has blinded them to the weakness in the housing sector for two long
July 13, 2011 at 5:04 pm
I see that the RBA would not be too concerned by these market movements until it actually sees this slump in confidence (the poor retailers, they are the ones going to hurt) flow through in GDP and CPI figures. Lucky for them core CPI still sits in the upper area of their band and Unemployment (the reported figure at least) looks great at under 5% and GDP has not yet fallen too far (lets see the next read). I can’t see a drop for a while (pending an actual EU bust) but I totally agree they would be very brave putting a lot on the line if they were to hike.
What we may see though, if the media reports that the RBA will drop rates next, is a slight rebound in credit and consumer willing to purchase goods as they think their loan interest but come down. This is something Mr Stevens would not like, and a fresh round of Hawkish rhetoric may needed
July 15, 2011 at 4:46 pm
Massive fan of you using a Banksy for the elephant!