RBA still in the game…

Prima facie there is nothing in the GDP data today that prohibits the RBA from hiking rates in June and the AUD and swap rates have reacted as if the chances of a move have certainly risen since 11.30 am today. The AUD is closing in on 1.0750 and 3 year swaps are up almost 10 bps from the lows of this morning.

Certainly we don’t think they will or should hike rates but to the extent that the outturn is pretty much a reflection of what they told us would happen, ie floods ravage growth but things ok otherwise, it’s not exactly the red light we had hoped it would be. Don’t get me wrong we are not flip flopping nor changing our tune but we simply wanted to highlight that if the RBA looks through all of the arguments we, and others, have been making about the data flow since the SoMP in early May and sticks to their central tendency and rhetoric then they could hike.

The political cost to them will no doubt be huge if they go soon – but then again they probably aren’t worried about that at the moment.

So to today’s data. Here is a chart of the break up of contributions to the overall outcome of minus 1.2% for the quarter.

But lets take it down a level, in terms of break down of industry and see what each of the ABS classifications contributed to growth.

It is clear that mining contributed half the 1.2% fall for the quarter which is substantial given its overall small size in the total economy. Manufacturing and Agriculture were both down as well contributing -0.2% each to the total -1.2%, again big falls of over 2.4% and 8.9% respectively for each sector over the quarter. Interestingly retail provided nothing in spite of the strength in domestic final demand and in the context of the strength of this +1.3% all up the part that is household consumption which rose 0.6% qoq.

The chart below is straight from the ABS with our interpretation and stylisation. We have attempted to break up the data for households into discretionary (with a pink elipse around them) and non discretionary items and on the basis of this calculation would argue that the strength of this number in terms of GDP flows not from Australian Households WANTING to spend more but from Australian households HAVING to spend more.

Now clearly we are talking our book, or our view, here so you should analyse our viewpoint with a critical eye but we are confident we are right. Indeed when we take the above and add in the story of the savings rate which leapt from 9.7% to 11.5% (see below – back at generational highs) and the knowledge that the cohort of over-50’s households who have 25%, or 208 bln, of the outstanding stock of owner occupied housing debt and want to repay it in the next 12 years, we see a domestic economy that remains challenged and an economy that is as bifurcated as can be.

This data to us tells two stories.

Firstly if the RBA wants to tighten this fits with their narrative and won’t stop them.

But the second point we’d make is that even though we know that there is going to be a post flood bounce and the domestic economy grew around average this quarter the break up of growth and the enduring increase in the savings rate means the economy still faces many challenges.

It’s like we wrote this morning – the RBA is balancing the 54% under pressure against the 46% doing ok. They have time and we think they’ll wait a few months yet if they are going to pull the trigger.

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  1. RBA still in the game… | Lighthouse Securities | Brisbane Real Estate - June 5, 2011

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