The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, January 26, 2011

One of the best in the business gives us his take on rates

UBS's Scott Haslem and Matty Johnson are top notch. I remember Scott telling me ages ago that he could not see where the inflationary pressure for Q4 was going to come from. Spot on. Matt also picked the three low inflation reads in 2010, and the very low GDP prints (and he has been a long-term bear on Q4 GDP). This is what Matt had to say on yesterday's data, which seems pretty fair to me:

  • "CPI was lower than everyone expected
Core CPI inflation for Q4’10 was 0.4%q/q (+0.3%q/q for the trimmed mean and +0.5%q/q weighted mean). This was lower than the market and the RBA expected (mkt +0.7%q/q, Q4 SoMP implied ~0.7%q/q).

  • Low inflation may be a correction from ‘stimulus-inflation’
An unusual combination of elevated inflation and rising unemployment between September 2009 and March 2010 coincided with the large injection of fiscal stimulus money – in response to the GFC. The recent combination of low inflation and falling unemployment looks to be a correction from stimulus induced ‘too-high inflation’ back down to the normal relationship between unemployment and inflation.

  • Q4’10 CPI may not change the RBA’s inflation forecast
If recent low inflation is merely a correction following inflated CPI, then recently low inflation has little relevance for the RBA’s medium term inflation forecast.

  • The standard RBA Phillips Curve still predicts 3% CPI
The present inflation and unemployment combination is similar to 2006/7 – the point in the prior cycle where the RBA is widely believed to have fallen behind the curve. Like in 2006/7, low unemployment means a vanilla Phillips Curve (see Norman & Richards 2010) forecasts that core inflation will accelerate to 3%. History suggests further declines in the unemployment rate will lead to a larger increase in inflation.

  • We see RBA +25bps in Q3 and Q4 – but the risk is for an earlier move
We expect that the RBA will tighten twice this year (UBSe +25bps in each of Q3 and Q4) and twice in 2012. This is a little more than current market pricing (28.5bps to the end of the 2011). In our view, risk/reward favours trades which benefit from an earlier move."