Markets took a beating last night, but it had nothing to do with the economic outlook or the prospects for profit growth. Indeed the economic news, especially out of Europe, was great. In Germany for instance, factory orders surged 3.8 per cent in June, while industrial production in Britain surged 1.2 per cent in the same month. Over in the US, trade data showed exports surged 2.2 per cent in June – bringing exports to a new record – while the trade balance itself fell to a deficit of $34 billion form $44 billion. A key implication of the trade data is that the soft June quarter GDP figure we saw will most likely be revised up over 2 per cent, and possibly even above trend.
Despite this, stocks in Europe were off between 0.4 per cent and 1.2 per cent, while on Wall Street the S&P500 closed 0.6 per cent lower (1697), the Dow lost 93 points (15,518) and the Nasdaq was off 0.7 per cent (3665). Better economic news obviously wasn’t the focus last night – it looks like we’re back to ‘good news is bad news’.
The focus for markets instead was QE tapering fears, apparently. We had two Fed speakers out overnight and both suggested that QE could be tapered at any of the next three meetings. The significance of one of those speeches at least, from Chicago Fed Reserve president Charles Evans, is that he is an extreme dove and is a fanatical supporter of ultra-loose monetary policy.
Price action elsewhere was as you’d expect – commodities were weaker and crude fell 0.9 per cent ($105.6), gold lost nearly $20 to sit at $1283 although copper was up smalls (0.3 per cent). Bond yields otherwise did little, with the US 10-year 1 bps higher to 2.64 per cent. As for forex, the Australian dollar was almost unchanged at 0.8989, the euro was up to 1.3305 from 1.324 and the yen was at 97.73 from 98.45.
So then to the Reserve Bank’s rate cut yesterday, it attracted much attention as usual, but there is a growing sense that the board has gone too far. And it has, especially as it looks like the political motivations of the board are too obvious. The statement overall was unchanged, which means that global growth is expected to pick up, Australian growth is expected to be just below trend and inflation contained. Inflation currently is at the mid-point of the target.
This is all unchanged from last month, and of course makes no case to have the lowest rates on records. Indeed two hours prior to the rate decision we learned that house prices surged in the quarter and of course the economy more broadly has deteriorated quite sharply since the RBA cut rates – nearly two years on – with a huge chunk of that deterioration in consumer spending.
Will they cut again? The consensus has changed rapidly that rates may be on hold from here. I’m not as convinced – the statement was bland and vague, so I don’t think there was much information in the statement or guidance on rates. The sentiment was downgraded modestly given that they took out the sentence suggesting the inflation outlook may provide some scope for further easing, but the board still stands ready to “adjust policy as needed”. That’s a very minor change and not one worth changing your view on.
For me the policy makers really have no idea what they are doing, and the heavy political overlay on the Reserve Bank board is just dangerous. Cutting rates in the build-up to an election is a political statement. The problem is that the Labor government has been in disarray for years – it took them years to begrudgingly acknowledge they screwed up removing Kevin Rudd. If they can’t get their political strategy right, how can we expect this party to then come up with a coherent, workable economic plan to govern in the interests of the nation?
I’ve got no doubt the government smiled as it stacked the RBA board with ex-manufacturing lobbyists and ALP staffers, thinking it would be an easy ride to slash rates and impose an exchange rate target. They were right about that, but what they didn’t factor in was how disruptive this strategy (to get the lowest rates on record and a lower dollar) would be for the rest of the nation. Confidence is shot and consumer spending – the key driver of economic growth – has declined sharply from last year. Non-mining investment is still at recessionary levels almost two years after the Reserve started slashing rates. All in all, this is just one more failed government strategy.
Hopefully we’ll see some much needed discipline imposed on this reckless board with a change in government. At the very least, the Reserve’s easing cycle has brought no discernible benefit to the economy – the evidence in fact shows it has done harm. At worst, we’re already seeing the distorting influence record low rates bring. Indeed there is much press today of another house price boom – and why not, that’s exactly what we are seeing in Canada, New Zealand, England and, yes, even the US again.
Meanwhile, business groups warn that the latest interest rate cut won’t have much of an impact. So it’s an exercise in stupidity, then. The sooner we are done with it the better.
For today the SPI suggests our market will be off 0.4 per cent. Otherwise, we see domestic home landing data at 1130 AEST. Looking abroad, German industrial production data is key and we also see the Bank of England’s inflation report – the bank has failed to hit its inflation target for many years and has a woeful forecasting track record, so this report is less useful for markets. In terms of US data, consumer credit is out and there are some more Fed speakers (the Cleveland and Philadelphia Fed presidents – non-voters this year).
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.