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 6, 2011

ICAP's Adam Carr: to not hike rates tomorrow would be "idiotic" and based on "voodoo"

Another classic column from one of my favourite economists, ICAP's Adam Carr. He might have also added, If you can hike in an election month (November 2007), you can certainly hike three months after the first quarter (and associated GDP contraction) has ended:

"The RBA rate decision this week (Tuesday 1430) should be an easy one. Domestic demand is strong, the unemployment rate is at 4.85%, inflation is above target, core is accelerating, upstream price pressures are surging, as is the terms of trade. Consumer spending is either at or slightly above trend and that’s with savings hitting some serious highs. Business investment is rising and the amount of capex in the pipeline is mind blowing. Consumer confidence is above average, business confidence just below. Building approvals are running just above average levels and the global economy is booming. Inflation is rising - etcetera, etcetera, etcetera.

Against all that, against that fairly comprehensive run of data - the check list if you will of why the RBA should hike – we have only two quite weak counter arguments. And I use the word ‘arguments’ in the loosest possible sense. The first is that the RBA couldn’t possibly hike next week because of the negative GDP print last week. It was just too, well, negative and it would be bad PR. The second argument is that the RBA needs to wait for more data and needs more time to accurately assess the situation.

Up front, I think it would be unreasonable for any board member to rely on these arguments to oppose a rate hike, though I can’t say with any confidence that they won’t. So I’m not saying its unreasonable for an analyst to cite them, I’m saying its unreasonable for the board to use them. The debate has become surreal and unfortunately quite irrational. On balance though I would be surprised if the RBA Board did settle on either argument.

For a start, the hostility that retailers and others are showing toward this tightening cycle and the very aggressive public campaign against rate hikes isn’t going to change. Not next month, not the month after and not the month after that. From a PR perspective then I don’t think it will create any additional negativity for them - that is, that they wouldn’t get next month anyway or the month after. Indeed if the RBA does hold off this month, then the anti-rate hike lobby will only become more confident and more aggressive.

As for the 2nd argument, that they need to wait for more data, it should be obvious to a reasonable person that this is just ridiculous. Seriously, I mean what exactly would they be waiting for? A pick-up in domestic demand and consumer spending? Domestic demand is surging - up 1.3% in Q1 and that was with the floods. So it’s kind of already happened. What else are we waiting for? Ummm… signs that inflation is picking up? Happened. Headline is above target, core spiked in the quarter and upstream pries pressures are surging. The list goes on. We can’t, or at least shouldn’t forget that that the March quarter was 3 months ago. 3 months ago - a time when we were hit by devastating floods, earthquakes, tsunamis etc etc. Yet the Australian domestic economy was strong with above trend growth, elevated inflation and a low, sub 5% unemployment rate of 4.9%. That was 3 months ago.

So in actual fact, the RBA has already waited. They’ve been waiting since November and consequently have already fallen behind the curve. Think of it this way; interest rates are barely restrictive, yet inflation and labour settings already suggest, or rather they suggested three months ago, that this barely restrictive rate setting was too loose – inflation spiked, upstream price pressure surged the unemployment rate dipped below 5%. The Q1 domestic demand numbers confirmed this to be the case with a 1.3% rise in the quarter – consumer spending made a significant contribution to that lift in demand. Fast forward to April and retail sales show a strong lift in spending. The momentum was already there, it’s not just building all of a sudden now, in June. Now think about the outlook. Consumers have high savings – that’s a fairly decent armoury for more consumption. CAPEX intentions are very high and there is an enormous amount of work in the pipeline. Now think about the fact that monetary policy operates with a lag – 12 to 18 months – and most people have strong growth factored in for 2H11 and core inflation reaching the top of the band in 6 months or less.

No, the argument to wait is non-existent, even idiotic, and clearly not based on any robust analytical point – more ego I suspect. The case to hike was made 3 months ago, the fact that GDP was negative is irrelevant. Everyone knows this was caused by a flood induced slump in exports. The things that these people would have the RBA wait for are already occurring or have occurred. So its all voodoo my friends, voodoo.

What recent data has shown is that to stay ahead of the curve, the RBA should have hiked in the first quarter. So they are no longer ahead of inflationary pressures.

Whether the Board does actually hike, well, solid analysis and the exercise of reason suggests they will - and that is my forecast. But I can’t discount the probability that board members have been influenced by voodoo and mistruths. So the probability of inaction is high. Markets currently price a 10% chance of hike on Tuesday and the curve is pretty flat till October (60% priced) and 70% for November."