SCOREBOARD: Misplaced pessimism

Despite recent volatility, a series of strong economic and commodities figures has been unable to snap the malaise of economic pessimism.

Amid all the volatility the one seemingly unbreakable consistency has been how misplaced economic pessimism has been. Just as Australia was bracing for the third recession that we never had – the mining chapter – iron ore prices rebound and now it seems that Chinese trade figures are improving. Production figures from Rio Tinto, BHP Billiton and Fortescue this week will be interesting. It’s not that Chinese trade is surging, although exports were around twice the expectation at 9.9 per cent year on year. It’s just that 10 per cent growth can’t be described as weak, noting that something around 20 per cent has been the norm previously. These numbers can’t be looked at in isolation though. We’ve seen a rebound in European industrial production (latest figure Friday night show a 0.6 per cent lift in August after 0.6 per cent previously), the US ISM has turned and the all-important employment figures show strong jobs growth – equal to what we saw prior to the GFC. Just as the IMF says growth is slowing, most of the tier one data suggests the opposite.

The fact we’ve seen a strong rebound in iron ore prices and stronger-than-expected trade figures from China suggests that fears over global growth have been have been overplayed again. By the same economists and commentators who overplayed domestic and global economic weakness last year and earlier this - and of course we know they were wrong on that. Looks like they’ve been wrong again, which I guess isn’t that surprising.

For mine, and I think the recent data validates this view, the Reserve Bank most certainly panicked in cutting rates again and at the very least wasted valuable ammunition – should the worst actually occur. We get RBA’s minutes on Tuesday at 1130 AEDT, but there is nothing they can really say, honestly say, to validate why they cut rates given the rebound in iron ore prices and the turn in global economic data. It is more than just an ongoing embarrassment for them and those economists who mindlessly call for more cuts – rate cutter nutters. It’s actually dangerous. It’s the same mentality that caused the GFC and Australia’s very own house price boom – ‘cut rates to zero, harder, faster!!’ Yet no lessons learned.

For now, monetary policy is needlessly at a point, or close to it, where each additional rate cut will be less effective for the real economy, while at the same time increasing the risk of future imbalances (below 2.5 per cent or 2 per cent policy is completely ineffective). Not that rate cuts to date have had much of a positive impact mind you. Indeed lending and confidence numbers show the opposite is true. But this fact seems lost on many Australian economists and commentators – who themselves seem lost, confused by the fact that confidence hasn’t picked up more. We get another update on Australian home lending this week – today actually at 1130 AEDT, alongside car sales. So we’ll see. Assuming they cut again in November, the bank will have at best, 100bp to play with. Perhaps 50bp depending on funding costs. Meanwhile, the global economic data gets better and even JP Morgan managed to post a record profit on the back of a rebound in mortgages. Wells Fargo reported strong results also and of course, as we found out on Friday night, US consumer confidence spiked in October, almost 5pts to 83.3. This is a great result when you consider that the average is 86 and even during the boom years pre – GFC, the average was only 89.

Now there just happens to be a barrage of very important global data this week, especially on China. Noting that actual results rarely vary too much from expectations, it is likely that China’s economy grew at a strong 8 per cent in the third quarter (annualised) or by about 7.7 per cent YTD (data due Thursday 1230 AEDT). Industrial production is also due that day alongside retail sales. Chinese inflation figures are out today at 1230 AEDT (CPI and PPI), but for those hoping for more stimulus from the PBoC, the Chinese central bank governor Zhou Xiaochuan suggested that QE policies pursued by central banks around the world would cause inflation. He suggested that excess liquidity needs to be drained to prevent long-term inflation pressure. Instead what we are seeing is central banks drop their inflation targets. The market has long known that the BoE has ditched its target, although this has always been denied. Over the weekend the BoE governor formally dropped it, suggesting it was ok for inflation to be above target, to drop the target occasionally, if the bank felt it was warranted. The problem with that, is having the discipline to reimpose the target. The Fed, for instance, have always managed to find an excuse to print money. Recall that the initial excuse was deflation and depression. We are nowhere near that now and yet the Fed still prints. That was the whole point in having a target, to impose discipline on reckless central banks and their governments.

Anyway, there are a few other key pries of data this week as well. Tonight we get US retail sales, the Empire State manufacturing survey and business inventories. On Tuesday we see US industrial production, consumer prices and the NAHB housing market index. Then on Wednesday it’s housing starts, while on Friday we get the Philly Fed index and existing home sales.

The global flow otherwise incudes data such as the eurozone inflation and trade numbers, alongside the German ZEW survey on Tuesday. There’s a bit of UK data as well – retail sales and inflation. As I said a big data week not to mention all of the political stuff – for instance the EU kick off an "extraordinary” meeting this week.

That’s the lot, hope you have a good week.

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