MARKETS SPECTATOR: Oliver wants some more

Shane Oliver is not an iconoclast. He just thinks the Australian economy is too weak and the local currency too strong for the Reserve Bank of Australia to do anything but cut its benchmark cash rate to a new record low of 2.5 per cent today, from 2.75 per cent.

But the genial Oliver, head of investment strategy and chief economist at AMP Capital Investors, is just one of two economists out of the 26 surveyed by Bloomberg News who predict such a move. The other is at Macquarie Group, says Oliver.

“The reality is that the Australian economy is at crunch time,” he says. ”Mining investment has peaked and the rest of the economy is struggling.”

There has been no rebound in house prices in the last few months, consumer and business confidence is lacking and indications are that investment in the non-mining parts of the Australian economy will not fill the $30-$40 billion gap that will open now that mining companies are scaling back investments.

By not cutting the Reserve Bank will send a “wrong signal” to foreign exchange markets, says Oliver. The Australian dollar has hardly depreciated significantly, he says. It is trading at the “lower end of its trading range of the past two years”, says Oliver. At 0943 AEST it was at US97.60, down 0.1 per cent from yesterday, according to Bloomberg data.

The Australian currency needs to trade at US80 cents to provide any real boost to the local economy, especially manufacturers, the economist argues.

Does a rate cut give a boost to local stocks? Possibly, he says.

In the last month Oliver too has noticed a rotation away from bank shares and into mining stocks. But that abruptly reversed yesterday. Like other analysts Oliver says the market is “schizophrenic”. 

“Banks and (telecommunications) stock probably offer a safer bet,” says Oliver. “The weakness for the mining stocks is that the boom is over.”

The benchmark S&P/ASX200 Index’s 23 per cent gain in the last 12 months has just put the index back at levels it was in early 2010, says Oliver. A rate cut may help boost the index further.