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."

Monday, June 20, 2011

But market's rate *probabilities* may be right (chart)...

Matt Johnson at UBS does a nice job of summarising the interest rate probabilities implied by current market pricing, and argues they may be right, just now. I don't disagree violently. This is a mistake people often make when comparing market pricing to economists' expectations. Economists (and the RBA) think in terms of a most likely, or modal, 'central case'. Markets provide a more precise probability-weighted cash rate forecast, which is obviously different to the modal case. It is useful to distinguish between the two. Matt comments:

"Thinking probabilistically, however, the market seems about fair for the near term – if one allocates probabilities of cash rate moves as we have done in chart 31, to the right (-100bps = 2.5%; -75bps = 2.5%; -50bps = 15%, -25bps = 10%, steady = 50%, +25bps = 19% and +50bps =1%), the expected change in the cash rate is -9bps. Current market pricing is ~ -3bps. Should the European situation clarify, the probability of cuts would decline, and the expected value of the cash rate would rise."