THE DISTILLERY: RBA roundabout

Jotters are divided on the Reserve Bank's imminent interest rate call, and whether the global economic picture is supportive of a cut or a hold.

Domestically and internationally, the Reserve Bank of Australia is staring at economic narratives that can be read confidently by the bulls and the bears.

In one sense, the east coast of Australia is in recession as it battles a high dollar, inspired by the west coast’s mining sector that isn’t all that hot. A cut feels necessary. But inflation is fine and unemployment is terrific.

Meanwhile, Europe is facing a prolonged recession, the US is hurtling towards a fiscal cliff and China is slowing amidst a delicate leadership transition. But at the same time, the European Central Bank says it’ll do "whatever it takes” to keep the eurozone together, the US Federal Reserve is printing money seemingly to infinity and China will ease up dampeners on its economy at some point.

Where is the RBA to go?

This morning’s edition of The Distillery hits all these themes as the Reserve Bank prepares to announce its interest rates decision for October.

The Australian’s economics editor David Uren says the slowdowns in Australia’s two largest export markets, China and Japan, look like they’ll be enough to get the RBA to act.

"The biggest concern facing the Reserve Bank will be the weakness in key export markets. The most authoritative measure of world trade volumes, compiled by the Dutch government, shows there has been a 1.7 per cent fall over June and July, the first two-month contraction since the GFC. The International Monetary Fund had forecast in July that trade volumes would rise by 3.8 per cent this year and 5.1 per cent next year. Although the European recession is at the heart of the world downturn, Asia is being hit hard. Exports from emerging nations in the region have dived 6 per cent in the past two months, while imports are down by 4 per cent.”

The Australian’s Henry Thornton (a pseudonym for "an eminent independent economist”) also acknowledges the slowdowns in China and Japan, after his warnings about the US economy.

"The US economy continues its sluggish performance, despite successive rounds of innovative monetary policy easing, which is beginning to look increasingly like pushing on a piece of wet spaghetti. US fiscal policy is in a political gridlock that will not be resolved until after the presidential election. A bad beating for the Republican candidate might bring his party to the negotiating table, but a close result would entrench current adversarial attitudes. The default position is for a jump over a ‘fiscal cliff’, a leap into the dark of extremely rough fiscal tightening. A US ratings agency said recently: 'The US fiscal cliff represents the single biggest near-term threat to a global economic recovery'."

From what we can tell, Thornton’s remark about "pushing wet spaghetti” is a reference to the memoir of Pulitzer prize winning cartoonist Bill Maudlin, specifically his recollections about American General George Smith Patton Jr.

The full quote is, "If you’re a leader, you don’t push wet spaghetti, you pull it”. How many times has enough wet spaghetti, as opposed to dry spaghetti, been lying around long enough to inspire a metaphor that’s related to leadership and not cooking?

Back to the matter at hand, Fairfax’s Michael Pascoe says Australia’s economy simply isn’t showing the signs of strain the media claims it is if we look at the central numbers, which leaves the Reserve Bank with very little room to cut.

"Core inflation is low, but the non-traded goods sector is not so good and – if our dollar did fall – traded goods would jump. A section of society has convinced itself that we have a troublesome government debt, but we're one of a handful of countries rated AAA by both the US and Chinese ratings agencies. We are entering our third decade of unbroken growth with growth that is close to trend, but plenty of people think and have thought the economy is in trouble. Our dollar is stubbornly strong against the greenback, making life difficult for some industries, but also containing inflation and effectively making all Australians wealthier.”

Whatever the outcome, Fairfax’s Clancy Yeates reports that the banks are in a better position this time around to pass on the full rate cut from the Reserve Bank – or is that a weaker position to refuse to do so?

"As investors tip a two in three chance of a 0.25 percentage point cut at tomorrow’s Reserve Bank board meeting, the banks’ use of volatile wholesale funding markets has fallen well below previous peaks. Some $81.4 billion in debt will mature and need to be replaced in the year ahead, NAB figures show, with Westpac facing the largest funding task.”

The other big story that the commentariat examines this morning is the consortium bid for Arrium, formerly known as OneSteel.

Fairfax’s Malcolm Maiden says the POSCO-Noble Group bid was easy to reject "but it is almost certainly only the first exchange”.

Indeed as The Australian Financial Review’s Matthew Stevens points out, Arrium chairman Peter Smedley will be up for a long fight. He’s just officially waved goodbye to Spotless Group, which he defended vehemently from now new owners Pacific Equity Partners.

The Australian Financial Review’s Tony Boyd says there are two wildly different views on the takeover bid for Arrium. The first is that it’s an opportunistic play for a company that’s embattled now, but about to double its earnings. The second is that it’s a risky offer for a company facing a margin squeeze on its steel business and outright oblivion with its iron ore business.

Business Spectator’s Cliona O’Dowd says the make-up of the bidding consortium sheds some light on the strategy behind the play.

"Posco is sure to be eyeing up Arrium’s steel distribution network in Australia, while Noble will likely have a keen interest in the group’s iron ore business. For Posco, Arrium’s Whyalla plant in South Australia would give it an advantage as the steelmaker looks to bulk up its Australian assets.”

In other company news, The Australian’s Glenda Korporaal points out that Crown would be more that happy with the sponsorship deal the company has with the redeemed Melbourne Storm rugby league club.

Fairfax’s Elizabeth Knight surveys the lay of the land at Echo Entertainment, which is looking increasingly vulnerable given the overtures by gaming billionaire James Packer.

Fairfax’s Eric Johnston reports that a shift in global auditing rules will allow Australian auditors to raise more red flags with companies.

Fairfax’s Peter Cai reports on the continued weakness shown by China’s manufacturing sector. The Australian Financial Review’s Tony Walker makes the interesting observation that China’s leadership has chosen to conduct its own presidential election – not an election in the conventional sense – around the same time that the United States heads to the polls.

And finally, Fairfax’s Eli Greenblat mines an under-utilised source for stories, the list of companies delisted by the ASX.

"A renewable-energy business chaired by a former deputy prime minister, a company that owns a strip club and brothel premises in Melbourne, and one of Australia's largest makers of extra-virgin olive oil were among 21 companies suspended by the exchange for not handing in their full-year accounts.”

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