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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate August 2019: Is it Time to FIX Your Rate?

Today Governor Lowe and the Reserve Board met and they kept the cash rate on hold at 1%. Now that’s obviously on the back off two rate cuts that we sold in June and July, which took the cash rate down to 1%. So the consensus is that we needed to see some time to see what impact those two particular rate cuts have had in terms of confidence, sentiment and what’s going to flow through to an actual numbers.

But also don’t forget we had the tax stimulus that’s also being put in there — so more on that because we do believe that the cash rate could go as low as half of 1% as early as February next year. So I’ll talk more about that as we go through this presentation.

 

I want to start globally now. Obviously the biggest game in town at the moment has been the trade tensions between the US and China and trying to get that right. Well, there’s obviously lots of gamesmanship that’s going on in that space. And that is definitely affecting global tensions around confidence and also in sentiment in the broader economic story around the globe. That’s obviously led to some revisions in terms of global growth across, not only obviously the US and China, but also right across most of the developed nations. Now that also led the Reserve in the US to cut their cash rate. So after a tightening cycle, they actually cut their cash rate down by 25 basis points last week. And so they ban now is 2.2 – 2.25%.  What was interesting about Jerome Powell’s commentary there — most commentators wanted to see more dovish commentary around further corrections in their monetary policy — but the reality has been that Powell basically surprised the market a little bit saying it was a bit of an insurance policy cut, not necessarily a sign of a deeper correction cycle or easing cycle. So that did surprise the market. Now, he did also clarify that there may be one more to come. But I thought most people were thinking that they’re going to see the US cash rate drop even more substantially.

So, one, that’s a vote of confidence of how well the US economy is performing — but, again, it’s an insurance policy about what’s happening, in terms of the global trade and how that’s affecting sentiment.

We’ve seen the US equity markets performing very, very strongly on the back of that easing, and I’ll talk more about the Australian equities market later, but that is obviously one of the big news stories that’s not going away anytime soon.

The other is Brexit. So we now have a new Prime Minister of United Kingdom — Boris Johnson.

What has been interesting about Boris Johnson is that he’s saying, come hell or high water, come 31st of October, we are exiting the European Union. So he’s saying deal or no deal, which could lead, again, to a lot of brinkmanship up until that point. But he’s telling his people that that is it. So they might not be a deal — and that’s interesting, really, because what’s going to happen to Ireland? Because, effectively, they wanted a backdoor stop for Ireland. Well, this could be… this is an early, early call, but will the United Kingdom be around? Or will we be back to Britain? And different parts of the United Kingdom? So lots still playing out there in politics in the United Kingdom. And that uncertainty also impacts economic activity and investment. And that’s what we don’t need, in terms of growing the global economy.

And, finally, we’ve also seen the developing story in Hong Kong that’s been playing at over the last month, in terms of the democratic protests that are going on over there. And those protests are continuing, and so hopefully China doesn’t use a heavy hand with those protestors because, again, strong-forced, strong-arm tactics is going to cause some tensions around what that means for Hong Kong being a financial hub. So, China please keep your powder dry, don’t do anything silly in regards to that. Those global tensions are obviously problematic in terms of global growth.

 

Let’s swing our attentions back here to the Australian market.

What is very clear —and I’ll continue to keep repeating this for those who haven’t really had the penny drop — is it’s very clear that the RBA are going after the labour market… they are going after a lower unemployment rate.

In their view, they need the unemployment rate at 4.5%. 4.5%, they believe, is going to be a trigger for higher wage growth. So wages growth and sustainable wages growth. We saw what happened in the US where they got their unemployment right down, I think, to as low as 4% percent — we have seen wages growth start to materialise during that time. But under the gig economy, it’s getting hotter and hotter. So the RBA is going after that number. So that doesn’t mean that they’re worried about the broader economy — they’d certainly locked to see it growing stronger, and they’d certainly like to see the Government of the day, being the Liberal government, doing more in terms of fiscal policy. But we know that the politics in Australia right now is that The Liberal Party are going after their surplus. They want that surplus this financial year. So I don’t think we’ll see any fiscal stimulus until they hit that surplus. And if they hit that surplus, then we’ll see in the next May budget probably some more fiscal stimulus to support the monetary policy easing that’s going on by the RBA right now. So that is a big story.

 

In terms of inflationwe’ll just get to some of those numbers. So, going after that low unemployment rate also means that if we do get wages growth, we would normally see that flow through to inflation. Now, there was an important speech made by Governor Lowe this past month, which did talk about why they want to continue to keep the 2 – 3% target range, in terms of their forecasting all their mandate. They believe that would maintain the credibility, and that would also mean that they can anchor their decision making around that 2 – 3%.  In broad terms, if the economy is growing and inflation is growing at 2 – 3%, usually the economy is doing well and that means better employment and better living conditions for those people in our fine country.

So, coming back to inflation data that was released for the June quarter — we saw a 0.6% increase, which was higher than market expectations of a 0.5% increase. That took the annual rate of inflation to 1.6% for the June quarter annualised. Some big numbers in there. Really, when you start thinking about it, three big things applied out there — fuel up 10.2%; medical was also a higher than expected; and the Australian dollar also meant that we had international travel inflation, it was costing us more to go overseas. So they were the main triggers. But the underlying inflation is still very, very soft. And that, again, is why the RBA needs to do something about that.

 

We talked about the labour market — let’s look at the numbers for the past month. Unemployment Rate was pretty much a flat at 5.2%. We only grew new jobs by 500 — we have had some strong jobs growth over the past three or four months — so it’s still not a good number, and that would be concerning for the RBA. In regards to that: job ads, which was a positive, rose by 4.6% — but we’ve got to remember that the May job ads was down significantly. So that was a bit of a recovery of what was a poor number there. Business confidence — so we’re moving through inflation, we’ve obviously then talked about the labor market, and now our business confidence. This is the one where… remember a lot of this data is lag data. So some of these confidence things is also about leading indicators as well. So positive story here in terms of business confidence — went from a -1 in the March quarter to a +6 in the June quarter. That means that, broadly speaking, people are feeling a little bit more confident post-election in the business side of it.

That still doesn’t mean that confidence is actually materialising into activity yet.

And so that is something we just need to keep an eye on — but the ship is hopefully turning in the right direction and gathering steam in terms of credit growth.

 

There’s some fascinating numbers around credit. What credit represents is people who’ve got confidence and they’re investing. So, housing credit growth in June was up +0.2%, business was only up 0.1%— so that’s still not where it needs to be — and personal credit growth was actually -0.2%. So annualised credit growth is sitting at 3.3%, which is the slowest pace since September of 2013. So I’ll tell you the story, right? Credit growth peaked in this current cycle at 6.6% in 2015. In 2016 it dropped to 5.6%. In 2017 it dropped to 4.8% and in 2018 it had dropped to 4.3%. And I’ll just read out the current rate — 3.3% — which is the lowest since September of 2013. So, again, they are lagging indicators, but ultimately if business confidence is moving and sentiments improving, hopefully that will see us gathering some momentum. In terms of the housing markets, we have seen a significant decline in medium and high density construction. In terms of new forward bookings, that’s off around 60%. So high density is definitely on the nose at the moment.

 

The positive news story for housing was CoreLogic’s Dwelling Price Index was released. We did see, in terms of the GLR result for the eight capital cities, saw a modest 0.1% growth story.

So that means we’ve effectively bottomed out — and that’s been the best reading since August 2017.

That’s obviously on the back off a couple of rate cuts, an election result, which was probably more pro-property, and we’re now seeing APRA make their changes, in terms of easing of their macro prudential interference in the marketplace — so borrowing power should improve. We really do think that we’re calling the bottom of the market over the course of this July/August/September period, which was effectively what I was saying post-election. I thought that we would bottom out in that August/September period. So that’s positive news for us.

If we turn our attentions now to the consumer — so consumer sentiment. This was a little bit of a disappointing result to be honest with you. Consumer sentiment fell from a 100.7 in June to 96.5 in July. Ultimately I’d like to see that bounce a little bit now that most people are starting to get access to the $1,080 for the low and middle income earners. So I think that’s an important story.

The retail spending — and I think this is why the RBA did keep the rate on hold today and also why I suspect that September will probably be a hold figure. Now if we see an unemployment figure that’s surprising on the down side, on the negative, then they may pull the trigger as early as next month for another 25 basis points. But my view, along with most economists, is that it will probably be October or November before we see a further easing to get the economy moving quicker. So, back to retail spending — this is effectively a flat result. So it’s lag data — so it’s not the latest month; it’s still May data. It take them a little bit longer to crunch the numbers. So in May it was a0.1%. Now, that was after a decline in April, where it was a -0.1%. Annualised, we’re looking at 2.4%, which is the weakest since January of 2018. So more work to be done there. And that is one of those indicators that I’d like to see improving — the problem is it’s a lagging indicator, so that’s why it takes a while to see the positive numbers flow through.

Some other highlights — the equity markets. What we are seeing here in the Australian equity markets is we’ve hit our highest point in 11 years. We’ve reached a record high — and this is going back before the GFC, which was our last record high for the ASX 200 — and that happened last week. Now why is that happening? It’s really simple. Okay, so the cost of money goes down, so depositors can’t get a good return in keeping their money in the bank. So they’ve got to look for better places to put that money where they are going to get a better return than literally nothing in a {…} savings account — all less than 1 – 2%. It’s not, not worthy. Whereas they could potentially in the equity markets obviously get some dividends, distributions, those types of things as well as some price growths.

So the cost of money goes down, asset values go up, which means that share prices are usually revalued.

So we are seeing a flow of capital into the equity markets with this view that interest rates are going to stay lower for longer and they’re going to keep deteriorating. So, we might see this particular run in the Australian stock market continue on for some time until we have some clarity around what’s happening in the broader economy.

 

In terms of closing out to this month’s message, I want to talk about the borrowing side of the story. So there’s still a lot of attractive fixed rates that are starting to be promoted by the banks at the moment. My view on those fixed rates is: steer clear of them. No need to fix your rates. Variable rates are going to be your better call at the moment if the rates are going to continue to keep falling.

So, we talked about a potential rate cut, which will be another 25 basis points in October — and even a further cut that could happen in February of next year, which will bring the cash right down to 1%. Why is that the case? Well, again, if the, if the federal government isn’t going to do anything around fiscal stimulus, unfortunately the RBA is going to be doing most of the heavy lifting. Now, property prices are improving. We’re not going to see a run on property prices on anything. — we’re going to see a huge bounce in property prices. What we will see though is in some of the better areas, which have probably had more volatility, will probably bounce back really quickly. But in terms of the broader property market around Australia, we’ll probably see more steady and sustainable price growth as opposed to rapidly increasing property prices, which we saw in the earlier part of this easing cycle.

So my message is back to you around fixed rates.

I would only be fixing rates if you have uncertainty around your financial position. But I would be taking advantage of the variable rate.

 

That’s not decided that the lenders are going to pass on the full rate reduction from the cash rate — that’s not going to happen. They’ve still got to keep some margin for profitability. So even though the cash rate might fall another 50 basis points — we may only see the lenders passing on as little as sort of 25 – 35 basis points of that. And I know that doesn’t sound great — but ultimately they’ve also got to consider their depositors, in terms of how they raising money and also keep their margins of profitability, to keep them strong and viable. So, yeah, interesting times ahead.’ll definitely have to wait and see what comes out of the unemployment data. That’s our big indicator in terms of whether we’ll say rate cut in September or whether we’re going to be waiting until October or November.

Thanks for watching this month’s update and we’ll speak to you next month.

 

 

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