The fact US payrolls were stronger than expected didn’t seem to spark much excitement from Wall Street on Friday night. US stocks were all weaker, around the 1 per cent mark (although European stocks rose between 0.1 per cent and 0.6 per cent) and commodities were belted – with crude and gold both down over 2 per cent to $84.79 and $1678 respectively.
Despite the market reaction it was very good data though, firming up my non-consensus view that this labour market recovery is strong. Recall that we can see this with a quick reference to jobs growth in the pre-GFC period – or the boom years. Jobs growth was around 130,000 per month or so on the payrolls measure and over the last three months we’ve seen jobs growth more like 170,000 per month. That’s strong growth. Indeed jobs growth in this recovery so far has been stronger that pre GFC which puts QE infinity in an interesting light. But the PR is that jobs growth has been weak. Demonstrably and objectively false but that’s what we are dealing with.
The narrative so far is a simple one. After a temporary lull, global growth is now on the rebound and we have seen that consistently in most of the tier one global data. As I argued some time ago, the global economy isn’t deteriorating, it’s getting better and this is what the data shown us.
Now there should be implications for the RBA (decision Tuesday 1430 AEDT) this week. There really should be a 0 per cent probability of a cut. That’s because we’re suddenly dealing with a global economy that’s looking a lot better than policy makers thought. Moreover, inflation is now not so low – broadly in the middle of the target band according to core inflation, from what was the bottom of the band. And of course, the Australian dollar hasn’t really budged much since they started cutting.
It’s hard not to notice an unsettling pattern developing with regards to this easing cycle. When you go through each press release on the occasions they’ve cut, nearly every factor nominated by the board as a reason, has come to nothing. And that’s been the case consistently since November 2011. Weak consumer spending and domestic demand turned out to be strong consumer spending and domestic demand. Low inflation, not so low. Europe hasn’t imploded, global growth is reaccelerating, China didn’t have a hard landing and the slump in iron ore prices – the great end to the mining boom – turned out to be nothing. Well not nothing, a great embarrassment to those chicken little policy makers and politicians making that cry. Our leaders – the nation’s generals! Spare me!
It seems the RBA board has been panicking in response to whatever the latest headlines have been – the latest fear. This doesn’t inspire confidence in the nation’s policy makers and we’ve seen that in a variety of indicators. Confidence has actually been worse since the board started cutting. This unfortunately, is damaging the credibility of the RBA board at time when central banking more broadly is held in low regard.
Otherwise, the piece I wrote last month is more relevant than ever. I’ve really only read one piece arguing for more rate cuts and was sincerely shocked to find that it still relies on forecasts of doom and gloom. History has shown this has been a flawed policy model. You can’t, well a sensible central bank shouldn’t, continue to throw away valuable policy ammo on forecasts/concerns/fears that never seem to eventuate – are repeatedly wrong. We should only be cutting rates if things actually do go wrong.
Unfortunately we are very close to the point where if something did go wrong, we’ve got nothing to fight it with (a cash rate below say 2.5 per cent or 2 per cent offers no additional policy stimulus and we’re at 3.25 per cent). So why are we cutting? Political motives loom large as some have suggested and I have sympathy for that view. The government is deeply unpopular after all and has clearly stacked the board with ‘friends’ – manufacturing lobbyists and ALP staffers. Whatever the case, economics doesn’t really seem to be playing much of a role and so we’ll probably get more rate cuts at some point. On that note, Paul Kelly wrote an excellent article in The Weekend Australian noting one of the key messages from the recent Economic and Social Outlook Conference. It was that Australia needed much more intellectual honesty in public debate – I think monetary policy would be a great place to start because let’s be honest – there is simply no need for rate cuts with the economy we’ve got. That may change, sure (it may not), but let’s only cut rates if it does hey?
The next panic over Europe perhaps and that may even come this week (Greek parliament votes on latest reform measures). As I highlighted last week there was some bizarre behaviour from Europe’s politicians. The political rhetoric – the game – is picking up and the words are anything but soothing. German Chancellor Merkel even suggested we’ve got five more years of this, which is true if that is what they want. Because the solutions are not difficult as I have highlighted in this column previously.
Other than the RBA’s meeting the other key release is the Australian employment report on Thursday. The consensus is that no jobs were created in the month of October, after a 14.5k increase the month prior, and that the unemployment rate rose to 5.5 per cent from 5.4 per cent. Otherwise there is a smattering of data – TD’s inflation gauge, retail sales and the trade balance (all today) and then then the ABS estimate of house prices tomorrow.
Looking abroad, the US, as always, has some decent data out but it’s a lighter week this week – just as well with the Presidential election Tuesday. The key economic releases are probably the non-manufacturing ISM report (tonight and then the trade balance on Thursday night (in addition to the usual jobless claims number). As for Europe, the key data includes producer prices, and then a run of German data - factory orders, industrial production and trade. The ECB also meets (as does the BoE) but nothing is expected. On Friday it’s also worth watching out for a run of China data – inflation, industrial production and retail sales.
Have a great week…