The Intelligent Investor Growth Fund is listing on the ASX. Initial Offer closes Friday.

As a matter of interest, keep an eye on the weather

Even for those with no mortgage to worry about, punting on the Reserve has become a national sport.

Even for those with no mortgage to worry about, punting on the Reserve has become a national sport.

PICKING which way the Reserve Bank will move on interest rates is becoming a bit like picking tomorrow's weather forecast. Statistically it is a better punt that the weather will be the same tomorrow as it is today. In the broader community, talking about interest rates movements has also become almost as commonplace as commenting on the weather.

In years gone by, rate spotting was the domain of business and those inside the finance industry. Today it's a national obsession, even though only a third of us have home loans. In addition, the broader community is watching all the economic data that feeds into the RBA's decisions on rate movements.

We seem to equate interest rate movements with the health of the economy and thus our own financial well-being.

This week one such measure, the Consumer Price Index (let's call it our temperature gauge), was looking positive, a sign that we had not yet received a bad dose of the US and European debt virus. But yesterday's unemployment rate (let's call this blood pressure) was on the high side.

The market responded by selling off the dollar and shares, having done exactly the opposite the previous day when the CPI figure was released.

Rather than getting too excited about either figure, they should really be viewed as short-term snapshots that can be influenced by many factors and can sometimes be explained by events that do not reflect the broader state of the economy.

The stronger CPI figure is primarily accounted for by a build-up of stocks, in other words inventories of goods bought by business and not yet used. This signals weaker rather than stronger demand, or more likely the fact that businesses previously over-estimated demand and were left with inventory in the June quarter.

This is not to suggest that the economy is not growing but it may not be quite as fast as the figure is suggesting.

When it comes to the employment picture the statistics can be an equally misleading measure of economic health. The first reason is that they account for only one month, August. The second is that the rate has not moved up to a worrying extent. HSBC's chief economist, Paul Bloxham, makes the point that businesses went on a hiring spree after the global financial crisis because of fears of labour shortages.

He believes these employment figures suggest businesses may have been hoarding labour for the past couple of years in expectation of growth plans in 2011.

Again it could be previous business expectations getting out of kilter with the economy.

Having said this, there is evidence emerging that businesses are starting to let excess staff go, particularly in manufacturing.

There are also signs the male unemployment rate is moving up faster than than the female rate, but the continued weakness in the retail sector may see that equalise over the coming months.

How significant this employment data really is will depend on how the numbers pan out over the next couple of months.

A bit of a rise in unemployment is not all bad, as it may take some pressure off inflation, which is the economic indicator on which the Reserve Bank focuses when determining monetary policy. Right now it is at manageable levels and nowhere near critical enough to warrant a cut in rates.

Indeed, when the Reserve weighs up the negative and the positive figures coming out of our "patchwork" economy there remains no real cause for alarm.

It makes a very strong case for keeping rates on hold for a while yet, which is the view of many, if not, most economists. As for the dollar and the sharemarket, there are many other factors that feed into how these behave. Our strong terms of trade feed into exchange rates. But our dollar is measured in comparison against other currencies and in particular the US dollar. In large part our strong dollar reflects the fact that foreign governments and central banks are manipulating their currencies down to stimulate their economies. It is likely the Australian dollar will continue to trade above where it should be if normal economic forces prevailed.

Meanwhile, the sharemarket is strongly swayed by overseas equity markets even though it should, in theory, move as a proxy for future corporate profitability.

Stockbrokers are still factoring in significant earnings growth for the 2012 financial year but their expectations of overall profit increases are more subdued than they were two months ago.

Analysts have taken their lead from the commentary made during the 2011 profit season, which was notably short on corporate forecasts. Numerous chief executives of listed companies were not prepared to make profit predictions, and understandably so.

Many factors play into their models, around which there is a deal of uncertainty. There are plenty of questions over input costs and the dollar, even before a company takes into account demand for their products and services.

From the Reserve Bank's perspective, it would love to see the non-professionals get out of the prediction game and stop worrying about the details of the economy, in much the same way as most doctors would rather their patients got off the internet and stayed away from self-diagnosis.

Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles