Stephen Koukoulas

Stephen Koukoulas

The first interest rate hike in the last monetary policy tightening cycle was delivered in October 2009, when the cash rate rose by 25 basis points to 3.25 per cent.

Three months before that rate hike in July 2009, the RBA Governor, Glenn Stevens noted:

  • "output has been sluggish and capacity utilisation has fallen back to about average levels, with some further decline likely over the rest of the year. Weaker demand for labour is leading to lower growth in labour costs. These conditions should see inflation continue to abate over the period ahead.
  • A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise. Business borrowing, on the other hand, has been declining, as companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards.
  • Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards, despite recent small increases. Business loan rates are below average. The effects of these changes will still be coming through for some time yet.
  • The Board's current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed."

The run of staggeringly good news on the economy continues to roll out.

Today it is a massive lift in retail sales growth – up 1.2 per cent in January and a stonking 9 per cent annualised growth pace over the past 6 months. Consumers are wealthy, with house prices and stocks adding close to $1 trillion to household wealth in the last two years. With high savings, consumers are spending up big.

Just wait until the labour market turns in the next few months and job creation and wages pick up. Retailers are in clover.

The only surprise is that so many people are surprised by these dynamics.

Wednesday, 05 March 2014 12:40

Whoosh! Interest rates are set to increase

Whoosh!

Did you hear that noise?

It was the sound of the Australian lifting a gear and moving back to trend growth.

The national accounts confirmed the Australian economy ending 2013 with GDP growth at a decent 2.8 per cent which translates to an annualised rate of 3 per cent over the final six months of the year.

If you were a policy maker and seeing GDP growth at trend, with inflation jumping to the upper part of your target, when the world economy is lifting, would you consider a record low 2.5 per cent cash rate to be appropriate?

Tuesday, 04 March 2014 14:44

RBA is starting to see a stronger economy

After the release of the labour force and capital expenditure data in recent weeks, an interest rate hike in March was always going to be off the table.

My forecast from five months ago for a hike in March, albeit wrong, left me with a profit on trading given the market was pricing in an interest rate cut for all of that time. So a wrong call that makes money? I'll take that.

The RBA announcement today highlighted its new found view that "growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate". Unlike many in the market, the RBA is clearly looking at the stellar housing activity (prices and construction), solid consumer demand, strong export growth, improving global conditions and a pick up in inflation to support this view.

Monday, 03 March 2014 12:34

The economy in a nutshell

• Job ads up
• House prices up
• Home building approvals up near record highs
• Retail spending strong
• Company profits growth up over 10 per cent
• Government tax revenue stronger than expected
• Business conditions lifting
• ASX near 6 year high
• Exports booming
• Interest rates at record low
• Government demand no longer restrictive
• Aussie dollar low
• Non-residential construction up
• Inflation lifting to upper part of RBA target band

VERSUS

• Mining investment falling very sharply (but note above the other 90 per cent of the economy)
• Employment weak (but note above, the ANZ job ads)

I'll take the high road on the weight of that evidence.

The Australia economy is significantly stronger than was forecast at the time of the release of the Mid-Year Economic and Fiscal Outlook in late December.

So says Finance Minister Mathias Cormann.

The Government Monthly Financial Statement for the six months to December, shows that tax revenue is flowing in to the government coffers at a 1.1 per cent faster pace ($1.754 billion in six months) than was forecast at MYEFO.

Encouragingly, the increase is quite broadly based.

Friday, 28 February 2014 15:15

Weekly government debt watch

With today's $800 million borrowing from the Federal government, the total amount of gross borrowing has topped $50 billion - $50.65 billion to be precise - since the election in September last year.

The government has had to borrow to cover the existing deficit as well as to cover some of its decisions on 'border protection' and the $8.8 billion is spent on the reserves of the Reserve Bank of Australia.

The total amount of gross debt on issue stands at $300.6 billion, a record high and up some $27.4 billion since the election.

Adam Smith, the father of economics, noted:

• "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from regard to their own interest".

So too Australian farmers.

Tuesday, 25 February 2014 10:59

AUD - Parity beckons

It seems most of the market has missed it, but the Australian dollar has already had its sell-off, dropping from 110 US cents in July 2011 to 86.60 cents just last month. The peak to trough fall is over 20%.

Down at around 87 or 88 cents was the time to get in because the pick up, back to around 90 cents at the moment, is just the start of trend that should see the AUD move back to 95 cents and then above parity.

UPDATE 1.20pm, Canberra time:

Aussie dollar now 0.8945; US stock futures down 0.2 per cent, Chinese stocks down 2 per cent, European stock futures down 0.5 to 1 per cent. Market assessing the G20 growth objective as useless, meaningly and unreachable. Hot air swallowed by an easily plied few, but not the markets.   SK

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It's Monday morning and financial markets are passing their judgment on the G20 Finance Ministers and Central Bank Governor's meeting in Sydney over the weekend.

The headline grabbing quest for an additional 2 per cent economic growth over 5 years for the world economy has been met with nonchalant indifference. US stocks futures are a piddling 0.1 per cent higher, recouping a fraction of the 0.3 per cent fall that was registered on Friday; commodity prices are flat; and in what should be a super-charging development for the Australian dollar – stronger global economic activity – the Aussie is less than 0.1 per cent higher at 0.8980.

THE LATEST FROM THE KOUK

Change of view on interest rates

Fri, 24 May 2019

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/watch-out-australia-theres-a-flood-of-dismal-economic-news-on-the-horizon-211110783.html

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Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.