Some fascinating comments from Annette Beacher of TDS after a global roadshow, which very much echoes my dovish Board thesis that was run last week (see here). This will be on display again at the June meeting, where the RBA execs are going to have to carry some very big brass balls to get a hike over the line. I will come back to this in a second (see excerpts from her note enclosed below).
Oddly given the current financial market schizophrenia, it is not hard to argue that the RBA's positive central case is firming up: one of the major risks to global growth, the price of oil, has been eliminated for the time being care of the recent commodity price correction. Oil price shocks, and their taxing consequences, are one reason why the global economy likely hit a bit of an air-pocket in Q2. With extraordinarily easy monetary policy in the US, UK and Eurozone this is, however, likely to be but a speed-bump, with more solid growth in Q3 and Q4 (barring a genuine European disaster).
The other key swing variable, the Australian dollar, has come in for serious smack-down since the last RBA meeting, and at the time of writing is headed south of 1.05 US cents (currently 105.17). Further risk-aversion, commodity price weakness, and, crucially, a gradual rise in US yields after the end of QE2 could see the AUD/USD pair trade back to parity. As I've argued here for a long time now, this thus poses further upside risks to inflation (the RBA's last forecasts were based on a materially higher 1.07 print).
Finally, the apparent success of Chinese action to curb an overheating economy only reinforces the prospect that their economic trajectory is likely to be a sustainable one in the near-term.
So, to Annette Beacher's (TDS) roadshow summary after meeting institutional investors around the world. This is not wonderful news for our central bank's credibility, and might (to a small extent) explain the stunning run-up in Aussie bank bill and 3 year bond prices in recent times. The market just does not seem to believe that they are going to have the kahunas to hike...We now await the capex data.
"RBA vs RBA Board
A distinction we had to frequently make was between the (neutral/slightly hawkish) RBA Board versus the (very hawkish) RBA.
While the RBA Board contains senior RBA staff, there are directors of “real world” companies such as retail, logistics and manufacturing, an academic, as well as the Secretary to the Commonwealth Treasury. The recent May Budget clearly spelled out Treasury’s concern for the ‘losers’ of the two-speed economy, as outsized assistance was pledged to those industries disadvantaged by the ongoing high AUD, particularly tourism and education.
Subsequently, while many analysts brought forward the next RBA tightening by several months after the hawkish SMP (claiming June is now ‘live’ whatever that means) we believe the Board members need a lot more information to sanction additional tightening, and hence we remain of the view that a few more months of on hold is more likely (hence our preferred August timing).
RBA tightening still incomplete
We expect the RBA to lift the cash rate by +50bp over the remainder of 2011 (penciling in August and November). After the 6 May “surprise” hawkish RBA Statement on Monetary Policy (SMP) this view was not contested.
Our additional +50bp to 5.75% by mid-2012 relies on the ongoing contraction of the unemployment rate and a return to consumer spending, reversing recent aggressive saving behaviour. This view generated more debate, with only 1/3 of the investor base agreeing that much additional tightening was required. Regardless, the OIS strip remains well underpriced for RBA tightening over the next twelve months (currently only +30bp by May 2012).
Key takeaway: monitor consumer spending to gauge the peak of the cash rate for this cycle – lower spending means a lower peak than our forecast 6% by end-2012"
