Company Profits another hurdle to a June RBA hike

Readers know we think that the RBA will be erring too much in favour of the mining boom and working too hard against the consumer/household sector if they hike rates at the June meeting, or for that matter July or August. We think the market misread the May SoMP because although the RBA retains a firm central tendency that the mining boom will sweep all before it (a fact reiterated by Ric Battelino last week) and thus a tightening bias they can not ignore the weakness that is creeping through the non-mining sector of the economy.Growth is just too narrowly based to use a blunt instrument on the economy.

To this end the data released today in the form of Company Operating Profits and Inventories highlighted this creeping slowdown and put another hurdle in front of an RBA hike. The increase in inventories was 0.4% against a 0.1% market expectation but some revisions to history have left it as less of a drag on Q1 GDP than the NAB had forecast at -0.2%. So it’s not too material.

Company profits were however a big drag and are in much worse shape than the market expected. We believe that there are two surveys released each month that are must reads and which give a myriad of data on the economy both now and into the future and as such are not to be missed each month. These are the Westpac-MI Consumer Sentiment survey and the NAB Business Survey.

Both of these surveys have some really interesting and informative sub-components and we have been watching the employment index in the NAB survey (white line above) as an indicator of the employment outlook. This has been telling us for some time that employment is not as rosy as the market thinks and suggested that company profits are being squeezed.

Turning to what the NAB survey has been telling us about profits the chart below shows the relationship between the NAB Survey’s Profitability index (shifted 6 months forward) and the ABS quarterly Company Operating Profit release that we saw today. It is clear what this has been telling us and what it is telling us still. Company profits are under pressure.

All in all this data along with the data for households places more hurdles in front of the RBA for a June hike. We think our economy feels like it did in 2008 when the RBA was fighting an inflationary pulse while the rest of the economy swooned. The collapse of Lehman Bros. just hastened what would have been inevitable RBA rate cuts anyway. We understand they are following their central tendency and that they believe that the mining boom and Chindia’s emergence is a multi-decade event. We agree with that assessment we  just don’t think that there is a rush to increase interest rates at the moment.

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2 Comments on “Company Profits another hurdle to a June RBA hike”

  1. Tristen Cosgrove Says:

    Great post Greg. I really appreciated how you explained the significance of the data in the graphs. I agree that China and India should do well in future economically, as should we in Australia. I am also a little cautious as we watch how emerging powers and established powers move forward together with an eye on the potential for conflict in Central Asia. Diversification, research and vigilance is required for investments.

    Reply

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