MARKETS SPECTATOR: Rates rethink

UBS has delayed its rate cut forecast in light of the Reserve Bank's monetary policy statement, and upgraded the outlook on Caltex.

Following Friday’s release of the RBA monetary policy statement, UBS has made some changes to its interest rate forecasts.

"Given no rise in the unemployment rate yesterday, today’s RBA SOMP causes us to delay our forecast of the next 25bps RBA rate cut to February, from December, post the fourth quarter CPI data”, UBS said.

The broker notes that there are still likely to be further positive effects from prior policy easing working its way through the system. However, it also believes the RBA is less certain on domestic growth and even more worried about the outlook for domestic inflation and productivity.

By allowing further time to assess the domestic economy and inflation levels, the central bank should be able to better judge whether it’s prudent or not to lower cash rates further.

Nonetheless, UBS still believes leading indicators will suggest a combination of another rise in the unemployment rate, as well as some of the third quarter’s inflation pressure dissipating.

Hence, the Swiss broker thinks the RBA will cut official cash rates by 25 basis points, the final time to a cash rate low of 3 per cent.

In other news from UBS, it has upgraded Caltex Australia to buy from neutral and upped its target price to $20.05 from $15.90.

The broker is increasing its refining margin outlook and estimates that the refining margin for the second half of 2012 has averaged around $US12/bbl. This compares very favourably to the first-half figure of $US9.87/bbl and the 5-year average margin of around the $US10/bbl.

"We see potential for the Caltex Refiner Margin to remain robust in 2012-14 due to improved externalities, and have therefore increased our 2H 2012 and 2013-14 CRM forecasts by $US2/bbl to $US11.50/bbl and $US11/bbl respectively”, UBS said.

On the back of this, UBS has upgraded its earnings per share forecasts as well as its forecast dividend payout ratio for 2013 – 2014. Summing up, the broker believes the business has potential to perform well over 2012 – 2014 with marketing earnings driven by Caltex’s premium product slate and the company’s ability to increase its market share in higher margin premium fuels.

Weekly chart of Caltex Australia

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Source: The Bourse

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