The RBA is for turning - it might take a while but we'll get there

Mon, 12 Feb 2018  |  

The following is s series of tweets I recently posted and given the feedback, I thought there were worthy of a blog post.

-----------------------------------------------------------------------------

The RBA is finally coming around to the fact that the economy is not strong and there is oodles of spare capacity that will not be mopped up for possibly several years.

The RBA were shattered, almost personally, with the low CPI result for Q4 and the jump in unemployment in December. Of vital importance, it has come to the view that the good employment data are not representative of labour force health - unemployment and underemployment are they key.

Wages growth and hence inflation will not pick up while the economy muddles along and the slack in the labour market remains.

Indeed, some basic modelling suggest inflation is more likely to fall below 1% than reach 3% in the next 2 years, even if GDP only marginally undershoots the RBA's very upbeat outlook.

House price are falling: This is good news, for sure, but careful what you wish for. The first few months of 2018 could spell some risks if house price falls accelerate and widen geographically.



The AUD not a major problem for exports/import competing sectors - at between 0.7500 to 0.8000 it is more a stone in the shoe; uncomfortable and slows you down when you are trying to pick up speed. Sub 0.7500 might be needed to see growth and inflation lift.

Buoyant business confidence is not being driven by top line economic growth, rather the squeeze on input costs – eg, wages. This is fine, but not as good for the jobs market if it was because business was booming. This is a vital change in dynamics for analysing the business surveys and what they are saying about the economy.

Capex / public spending are looking good for now: Risks tilting down on an 18 month time horizon especially as several infrastructure projects near completion. This is a risk to the 2019 forecasts,

The market pricing for rates reflects RBAs wonderful “Chatham House” briefing of market economists. They usually take the RBA view (don’t fight the RBA – 'its argument is quite good'). Calling the RBA out for policy failure and those meetings will dry up.

RBA needs to change market sentiment: Low wages data to be released next week may be the catalyst for a sea change. 

A low CPI in April, following a soggy GDP result in May and unemployment ticking up to 5.7% might see interest rate cut priced in by mid year.

comments powered by Disqus

THE LATEST FROM THE KOUK

Could tax cuts threaten our AAA credit rating?

Thu, 22 Feb 2018

This article was written for The Wire, a publication produced by FIIG. This link is here: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/16/could-tax-cuts-threaten-our-aaa-credit-rating

-----------------------------------------------------------

Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

Tax cuts stimulate growth

While the timing and magnitude of the income tax cuts is yet to be revealed, there is little doubt that there will be something of a sugar hit to the economy if the Coalition win the election and the tax cut legislation is passed. There will plainly be more cash in the economy rather than in the government coffers at the time the tax cuts are delivered. This would support bottom line economic growth and at the margin, add to inflation. Financial markets would also be impacted, if the US is any indication.

When next for the Aussie dollar?

Wed, 21 Feb 2018

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

------------------------------------------------------------ 

What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.