It wasn’t the most exciting week last week. Not much news or data, and stocks in the US finished down about 1.2 per cent – in part because of the renewed debt ceiling drama, but also because there is a view that US stocks have run too hard. The All Ords in contrast finished 0.8 per cent higher, which is good news – we’re outperforming for a change.
There was more action on the debt market as the US 10-year Treasury note rallied. Yields were down about 10 bps to 2.63 per cent, but that mainly reflects the fallout from the Fed’s decision not to taper.
This week however I doubt punters will have it so quiet. The news flow will change quite a bit and there are some critical events. In Australia, for instance, we have the Reserve Bank’s rates decision at 1430 AEST on Tuesday. We’ll see a few housing indicators as well, with the two – in theory at least – critically intertwined.
Now, up front, I don’t think we’ve got a housing bubble. Having said that, policy makers should be more concerned than they are about the distortions created by exceptionally low interest rates. It’s quite remarkable that we are even talking about a housing boom so soon after the global financial crisis, but it goes to show the dangerous game that policy makers play, and the reason why I’ve been against this easing cycle.
Think about this. Nearly two years on, there’s been little demonstrable benefit from cutting rates so low. Indeed, for most of that period, confidence deteriorated. Otherwise, non-mining investment remains low, as does dwelling investment, and even consumer spending deteriorated sharply from last year as rates went lower and alarm about a recession grew.
And now, absurdly, there is the prospect of a policy-induced house price boom. Whatever happened to policy makers trying to ‘smooth the business cycle’? Here and abroad, they do nothing but exacerbate it.
Anyway, there is little chance the Reserve Bank will raise rates in the next six months, as it is much more concerned about the Australian dollar – it has an exchange rate target. Don’t get me wrong, I think the board should normalise rates as soon as possible – or better, that they had never cut so low in the first place – but the rhetoric to date suggests there is little chance of that.
While no one is looking for a cut at this meeting, a Bloomberg survey suggests 12 out of 30 economists believe the Reserve Bank will look for a cut in November. Market pricing, I think, is around 40 per cent for cut at that point.
As for those housing indicators, we’ll see private sector credit growth today, while on Tuesday we get RP Data/Rismark’s house prices and building approvals, and HIA new home sales on Wednesday.
Before we deal with all that, though, there is this issue of the US debt ceiling. Apparently there is a risk that parts of the US government could shut down – with 800,000 people put on unpaid leave. As things stand, the House approved a bill that would renew spending until December, but only if President Obama delays ‘Obamacare’ for a year. Democrats who control the Senate have already said they will reject the bill. They’ve got till midnight Monday (Tuesday afternoon at around 1400 AEST, I think) to come to an agreement.
After that deadline passes, and assuming the government doesn’t actually shut down, the ISM index will be closely watched (Tuesday night) and the market looks for the index to stay around the 55 mark. But naturally payrolls will take centre stage (although these won't be released if the government shuts down). Given recent strong gains in payrolls and the decline in the unemployment rate, I suspect the key figure to watch is the participation rate. Recall that Fed chairman Ben Bernanke has implied he can’t fully embrace the decline in the unemployment rate or strong jobs growth unless it is accompanied by a lift in participation.
There’s plenty of Fed speak this week, too – Bernanke on Wednesday night – to add clarity to that view. Otherwise, Japanese industrial production, the Japanese Tankan, HSBC’s Chinese PMI and the China manufacturing PMI are all out.
Busy one, have a good week.
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.