As the Reserve Bank considers whether or not to trim its cash rate today, there is plenty of talk about a too-high Australian dollar and too-low consumer spending. Unfortunately, according to the commentariat, the first problem can't be safely remedied with rates, and the second is a self-interested furphy. Elsewhere, Coles and Woolworths are praised for their clever cunning, while Orica impresses – for now.
First up, Henry Thornton, the pen name of "an eminent independent economist" who writes for The Australian, thinks a rate cut today could cause problems down the track – especially if they're lowered in an attempt to bring down the domestic currency.
"If the Reserve Bank [uses the cash rate to target the Australian dollar], it will cut rates and it will be forced to cut rates further, as virtually every other developed nation has cash rates at zero, meaning Australia will join the ranks of inflationary nations. The cost of reversing inflation will be great and will compound the very issue of an uncompetitive economy that rate cuts will seek to overcome. Monetary policy cannot serve two masters. Monetary policy needs to focus on overall stability of the economy with low and stable goods and services inflation. If an excessive dollar is putting this objective at risk, the Reserve Bank or the government needs a sensible way to rein in the dollar. The simplest and least harmful way to do this is to impose a flexible but uniform tax on capital inflow."
And in the Fairfax press, Michael Pascoe does some Reserve Bank myth busting of his own.
"Combine record bank profits with a looming Reserve Bank board meeting and you’re bound to get a Greek chorus pushing myths and self interest: woe is us, the consumer isn’t spending and the evil banks rip off borrowers by not passing on all Reserve Bank rate cuts. They are two of the more persistent and pervasive elements of economic common wisdom, but they are demonstrably wrong and only parroted by the uninformed and those with other agendas. The consumer is not on strike and what borrowers pay does not significantly depend on the difference between Reserve Bank cash rate movements and banks’ lending rates."
Two companies that are no doubt crossing their fingers for a rate reduction, Wesfarmers and Woolworths, are in the sights of Adele Ferguson. Analysing the retailers' attacks on international suppliers that apparently charge Australian retailers higher wholesale prices than those in other countries, the Fairfax hotshot wonders if it might all be a diversion from allegations the locals are misusing their market power.
"It is against this backdrop - and as code discussions reach a finale - that Coles and Woolworths have cleverly shifted the debate from themselves to the big multinationals and the prices they charge in Australia compared with other countries. It is seen in some quarters as a cynical attempt to pressure the AFGC to agree to a voluntary code that doesn't deal with the growing vertical integration of the chains. The supermarkets want a code but they don't want it to be too onerous when it comes to mechanisms to deal with vertical integration."
Another big corporate story this morning is Orica, which is attempting to defy the resources slump by cashing in on miners' demands for greater productivity.
The Australian's John Durie thinks its a nice yarn, but he's reserving his judgement.
"Orica's Ian Smith yesterday attempted to redirect market attention to what the explosives company is doing to maintain sales as opposed to the knee-jerk reaction that says the resources boom is over so forget mining services. … The Orica boss is a master at spinning a good story around trying to identify and answer markets' concerns, and for the moment he has won some support. This of course will only remain while the numbers reflect his story."
As a side note, Tony Boyd notes Glencore Xstrata has given some weight to the story being peddled by Orica. The Australian Financial Review columnist runs through the commodities giant's useful checklist for deciding whether to proceed with investments, which could bode well for the explosives maker.
Now it's over to Australia's biggest resources companies, which Barry Fitzgerald is surprised to see cutting spending and increase investor payouts. As he writes in The Australian:
"In headier days, such an admission of going ex-growth (Woodside has stopped work on the Pluto expansion and has taken the Browse LNG project back to the drawing board) would have been considered a sin by investors in the resources space. Not now, as has been reflected in Woodside's 7.5 per cent share price gain since the April 23 admission. So what was previously a sin for a resources company – remember the entire sector is based on the depletion of underlying assets – has become a virtue."
This new normal for mining, including capital controls and major divestments, is also creating new opportunities for resources executives. The Australian Financial Review's Matthew Stevens singles out BHP Billiton's former aluminium chief, Alberto Calderon, has has opened discussions with private equity about leading a new international mining investment fund.
"The concert of deep liquidity in global capital markets and an emerging pool of newly unaligned executive talent across the resources sector is said to have triggered a rapidly growing interest by private equity in the opportunities that might fall out of the sector’s current move to monetise its most marginal assets."
Finally, at The Australian, Tim Boreham is happy to see a rally in Lynas Corp's shares, although he's not so sure it's solely because Malaysia's government was re-elected. He rates the stock a spec buy.