SCOREBOARD: Manufacturing rift

Not a great start to the week, what with the main stock indices in the US falling 0.45 per cent on the S&P500 (1562), 0.1 per cent on the Dow (14563) and 0.9 per cent on the Nasdaq (3238). It seems market participants took fright after  the ISM manufacturing index fell more than expected in March (to 51.3 from 54.2 and against a forecast of 54), while China’s PMI didn’t rise as much as forecast (50.9 from 50.1 and a forecast of 51.2). The ISM is a good survey but it bounces around like the rest of them – so one or two months where the index dips aren’t really worth getting concerned over.

We’ve had this every year really where the ISM dips, sometimes even below 50 – the ‘Spring slowing’ that people talk about – only for growth and the ISM index to bounce back. You really only need to be concerned with readings held around 47 for some months. I guess, with Cyprus in the background and North Korea throwing another tantrum, it was risk off. Not in a huge way though – US Treasury yields were down only a few more basis points (the 10-year at 1.84 per cent, the 5-year at 0.75 per cent and the 2-year at 0.23 per cent). And it’s the same with commodity prices (crude down 0.3 per cent to $96.9, copper off 0.8 per cent and gold up $4 to $1598). Otherwise, the euro is 35 pips higher (1.2851) than before the Easter break and the Australian dollar is at 1.04425.

So in terms of the other news flow there wasn’t really much else over the Easter break. Still nothing major out of Cyprus and indeed they are planning on getting into some casino action to boost their economy. Most of the juicy news flow was about North Korea.

If the SPI is any guide then, we can expect a 0.4 per cent rise on our market today following a 0.5 per cent fall on Thursday. Apart from that the main thing to watch out for today is Reserve Bank meeting, with the decision at 1430 AEDT.  Now no economists are looking for a cut at this meeting although just over half expect at least one more rate cut this year. Some like Macquarie Bank are a little more extreme and look for 100 bps worth of cuts this year. Now for mine, I haven’t changed my view. Most of the cuts we have seen this cycle were not needed and based on questionable analytics. At the very least it has to be acknowledged by rate cutters that none of the things they used to justify the easing cycle eventuated.

As regular readers will know, my argument was always that the price of money was never the problem in Australia. Even prior to this easing cycle rates were low. The only thing ailing our country was confidence and unfortunately the easing cycle itself contributed to subdued confidence. Normally cuts lift confidence, but only if there is something really wrong with the economy – otherwise the lie used to justify cut does more harm and actually offsets the cut.  

Obviously there was a lot going on globally as well, but it’s the same principle. If citizens see policy makers panic at events offshore – in small economies like Greece – when they haven’t had any real impact, people start becoming fearful. Now the reason why this is a problem is that when all the bad things don’t end up happening, you are left with rates that aren’t appropriate for the cycle. They’re too low – and I believe that to be the case now.

This in turn encourages distortions in the economy and a policy cycle that exacerbates, rather than smooths, the business cycle. Stability is what we all need right now and monetary policy under this board is not contributing to stability in my opinion, and I think the facts bear my view out.

So, I think the right course of action is for the board to hike by 25 bps today – better 25 or 50 bps today than 100 bps or 200 bps tomorrow (down the track). Remember 2008 and how hysterical Australian economists were about the inflation genie? Many of whom are the same ones wanting the cash rate sub 3 per cent now. I would rather avoid that for all our sakes. Take out the policy extremism for the sake of the country – and the best way to do that is to lift rates modestly now and take out some of the excess stimulus. Otherwise when it kicks in, there is a risk, but not a guarantee, it could kick in hard. But it is the risk. On the flipside, the sabre rattling of North Korea shows the wisdom in keeping some policy ammo left. So the idea that the Reserve Bank should still cut from here is simply beyond ridiculous. People who argue it have lost the plot.

I don’t think there is any chance the board will hike though and any correction is likely someway off – not because of the economics, but the biases of the board. In fact, I still don’t think it would take much for them to cut.  

There are a few other bits worth watching – RPData-Rismark’s house price index today at 1000 AEDT and then we see the Reserve Bank’s commodity price index at 1630 AEDT. There isn’t much on Wednesday, just the trade balance, and then on Thursday we get building approvals and retail sales from the ABS (at 1130 AEDT).

In the US it’s the usual story – lots of data and the key print this week is payrolls on Friday. Recall last month we saw strong jobs gains in the US  and the expectation is for another strong print in March – 190,000 according to the consensus, with the unemployment rate expected to stay at 7.7 per cent. There is a little bit prior to that, but lower tier stuff like factory orders tonight alongside some Fed speak (Kocherlakota, Lockhart and Evans).  Then on Wednesday night we see the non-manufacturing ISM index with initial jobless claims and trade data on Thursday.

For the Europeans there isn’t much one or two key pieces of data like German CPI tonight and the ECB’s decision on Thursday night. No changes, money printing or such is expected from the ECB at this meeting. Any commentary on Cyrpus they have will probably be the most interesting. Other than that it’s worth noting German factory orders on Friday.

That’s it have a great week.