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."

Friday, January 20, 2012

NAB: interest rate cut in February is 50:50 call

I agree. Frankly, I see no need to cut rates at all. I don't buy the global recession line. And I am still worried about global (and thus Australian) inflationary pressures, especially in the medium term. I don't agree with John Quiggin that the RBA should drop the singular inflation target and instead focus on nominal GDP (see his very stimulating op-ed in yesterday's ever-improving AFR--congrat's again to Michael Stutchbury and Brett Clegg for fixing this once-great paper).

But forgetting what I think, because, in case you had not noticed, I am not the RBA, my best guess at this stage is, like December, February is a very 'line ball' call for a eager-to-please, financial markets-enraptured central bank (ie, it shouldn't be, but it is). Anyone claiming it's a 'done deal' has not eaten their wheatbix for brekkie!

One key wrinkle is this: if you believe that the four major banks--they are the financial system these days and really all that counts--are entitled to maintain their current world-beating RoEs, and should not have to eat any of the current funding cost increases (or heaven forbid, cut executive salaries), then an RBA rate cut in February will be all about major bank margin preservation. (And do you get the irony? Remember bank profits have nothing to do with the RBA's cash rate, or so we are told!!)

If the RBA cuts it is entirely possible the banks pass on less than half, if any. So why cut in the first place? We've had two already, which have yet to have an impact--they take two years to have their full effect. And the RBA is the first to admit it cannot forecast the future. December was a weak-at-the-knees, let's dole out some insurance for our banking and financial market buddies, moment.

The RBA has time on its side. The one real rider to this is the CPI. And it is a D-Day of sorts for February. If core inflation prints super-low--say 0.3% or less again--and the Q3 numbers don't revise up, then I would agree the evidence is growing that the RBA can afford to furnish the economy with more accommodation. I still wouldn't cut myself, but that's just me. I care about savers, as well as borrowers.

Anywho, here is what NAB's very experienced Peter Jolly thinks:

"This brings us again to the RBA’s Feb 7 decision, which I expect remains a close-call. Today’s labour force report didn’t give us any fresh leads, as while employment growth is weak – exactly zero jobs were created in 2011 compared to 365k in 2010 – a bit surprisingly the unemployment rate has remained steady around 5.2% for the past six months. So downward pressure on wages and inflation remains modest.

Data to watch will be Wednesday’s Q4 CPI (NAB economists expect a benign increase of +0.5%qoq/+2.4%yoy) and then December’s NAB Business Survey Tuesday week. It’s not entirely brazen self-promotion to say that December’s NAB Business survey will be more relevant than usual because: a) we are getting very mixed reads on the economy and this is a good broad survey and b) it will be relevant to see how business responded to the 50bps of cuts late last year.

All up, a Feb 7 rate cut remains close to a 50:50 call at this stage. Market pricing little changed over the week @84%."