RBAaaay? What IS Stevens trying to say?


If you had of asked me what sort of speech I thought the RBA Governor would have given yesterday I would not of given hawkish a more than 20% probability after the recent run of data and June Statement after the Board meeting. But hawkish it was and Governor Stevens came out swinging. but what was he trying to tell us?

Yesterday in our piece on the NAB business survey we said we thought the RBA was on hold for a while. After the weak consumer sentiment we said

As we said this morning, the RBA is on hold for many months – perhaps the whole of 2011

But I have to admit that by the time I had finished reading RBA Governor Stevens’ speech yesterday I felt a bit like George Foreman after the Rumble in the Jungle.

I have done a lot of research in trying to understand the RBA’s approach to monetary policy both with an economy at full employment and with regard to their thoughts on the mining boom. This has taken me to almost every speech by a senior RBA official on these topics since 2005. In this context it is thus important to know that Stevens speech is not out of step with the approach articulated over many years.

That is to say the RBA adheres to a central tendency (China and mining boom increases income for all Australians at a time of capacity constraints) and then stress tests the risks surrounding it (savings rate of households, European sovereign debt, Chinese cyclical issues). This process is constantly being updated and balanced at each month’s RBA Board meeting with a decision on monetary policy then the result.

So my overriding feeling is that at first blush this speech is the child of the May Statement on Monetary Policy and that either the data or the RBA Board intervened in the mean time to keep the officials from hiking at last week’s meeting. My money is on a bit of both but from the speech I’d say it was the Board and the employees of the Board are at odds.

Firstly let me say there is nothing wrong with this, the Board is the ultimate decision-making body as in any such organisation and they take advice from management and then deliberate. Indeed I felt more certain of no move any time soon when the New Treasury Secretary mirrored Stevens comments yesterday but pointedly stated that mining was only 8% of the economy. But Stevens comment on this front alludes to management’s disquiet with the Board’s decision when he says

“the impact of the resources sector expansion does get spread around, in more ways than might immediately be apparent. Obviously mining employs only a small share of the workforce directly – less than 2 per cent. But to produce a dollar of revenue, companies spend about 40 cents on acquiring non labour intermediate inputs, primarily from the domestic sector. Apart from the direct physical inputs, there are effects on utilities, transport, business services such as engineering, accounting, legal, exploration and other industries. is noteworthy that a number of these areas are growing quickly at present.

Once the costs of producing the output and other factors – such as taxes – are taken into account, the remaining revenue is distributed to shareholders or retained. While a significant proportion of the earnings distributed goes offshore, local shareholders also benefit. In fact, most of us are shareholders in the mining industry through our superannuation schemes.We don’t get this income directly to spend now – it is in our superannuation. Nonetheless, it is genuine income and a genuine increase in wealth.

Jab, Cross, Cross, Jab – they certainly sound like fighting words to anyone who says the mining boom hasn’t yet spread the wealth around or is narrowly focussed. Mine own view holds that the income spread is not occurring in a manner such as to make Australian households feel that they are wealthier and thus they continue to overweight the size of their debt burden. So we have the spending and credit drought for a while.

I believe this is what is, and will continue to, hold back the Australian economy at a slower growth rate than the RBA thinks and with a slower and weaker income boost to the economy over the next few years. Indeed here is a graph that I received from Deutsche Bank yesterday on what they call their “Macro Pulse Index”, DB says that the MPI is

The Deutsche Bank Macro Pulse Index (MPI) is calculated as the average of the last 30 z-scores of data surprises relating to each currency. A reading above (below) zero indicates that the data flow has been better (worse) than expected. 

As you can see from the chart above the Australian Macro Pulse Index is at its lowest since 2006. Now it is important to note that this indicator has been built as a currency tool but I think you can see how the important data for the perception of Australia is flowing at the moment.

But clearly Governor Stevens speech was focussed on the medium term outlook and on China and mining, he effectively dismissed the current data particularly the weak consumer sentiment also released yesterday in answer to a question and I think that he was fairly pointed in saying that he still sees rates as rising in his conclusion when he says

The task for the economics profession – all of us here today and in like gatherings and institutions around the country – is to do our part in trying to understand these challenges and opportunities, to explain them to our communities, and to articulate the responses that are most likely to see our country prosper.

I have underlined what I think the important part of the excerpt above is and I think he is saying that he and his senior colleagues will be working at telling the community that in order to keep the Australian economic miracle going rates are going to have to rise.

It is a hard sell given the pressure households are clearly under but it is a sell the RBA seems committed to trying to close. So the risk is the RBA is telling us we are wrong about our thought that we were moving toward a situation where there was not going to be an interest rate hike in 2011 – that situation is nothing new for us. But we’ll have to watch the data particularly inflation in late July to see how things flow. August is certainly a live meeting again.



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 adviser we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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One Comment on “RBAaaay? What IS Stevens trying to say?”

  1. M-Bay Resident Says:

    I agree with your comments above, especially the live meeting in August, I feel that the RBA (staff, that is) feels the need to back up some of the jawboning it has been doing for the past six months. We saw in March where the markets started to price in flat if not down rate movements, and quickly RBA speeches were made that made everyone think, “oh, they know something we don’t, and will raise rates next moth”. But they didn’t, certainly the data supported the hold. I think we may be in that situation again. On Monday there was a les than 50% chance of a rate increase for the next 15 months. This is something that the RBA, with a tightening bias, supposedly full employment and inflationary headwinds, cannot do with. The expectations of flat rates means the consumer may become comfortable with the debt level, and unwinds some spending, there goes inflation. So, whilst I dont see the data to support a hike, 1 more sure would put the consumer back on the defence and worrying about their debt again, and the RBA can stand behind a very good record of managing inflation. It’s the economy I fear for, if this were to occur, A&R just shed another 500 jobs, that scares people, the RBA may not need to help.


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