Tuesday, December 04, 2012

Why the Bank should cut today, why the market thinks it will

The Reserve Bank is considered certain to cut interest rates after a last-minute deluge of data showed spending had stalled, profits had collapsed, the job market had shrunk and inflation had turned negative.

“Interest rate cuts come in groups,” said Bank of America Merrill Lynch chief economist Saul Eslake. “Like cockroaches, there’s hardly ever just one.”

“The Reserve Bank cut in October, it held off in November, and now it knows it needs to do more. If it doesn’t move Tuesday it will have wait two months until its next scheduled meeting in February.”

Retail spending stopped growing in October. The Bureau of Statistics says minimal growth in NSW and a dive of 0.5 per cent in Victoria were offset by continuing strong growth in Western Australia. The national growth rate of zero is significant because it came after a rate cut intended to spur spending. Spending on items other than food slid 0.7 per cent.

“It is clear the economy is in effect treading water,”said CommSec economist Savanth Sebastian. “Consumers are holding back on significant purchases. Lower pricing will have to play a part in enticing nonplussed consumers.”

The monthly TD Securities inflation gauge shows prices slid 0.1 per cent in November, suggesting the December quarter consumer price index will rise a mere 0.2 per cent, allowing ample scope for the Bank to cut again.

The ANZ job advertisements index slid a further 2.9 per cent in November, its eighth consecutive fall. Job advertisements are down 17 per cent since February.

Total wages and salaries paid by businesses actually fell in the September quarter for the first time since the global financial crisis.

Company profits slid 2.9 per cent... Mining profits slumped 12.2 per cent, offset by a rebound in manufacturing profits of 10.8 per cent. Small business profits slipped 2 per cent.

Inventories Inventories grew for the fourth straight quarter, climbing a further 1.1 per cent as businesses found themselves unable to move as much stock as they had expected.

“The Reserve Bank’s underlying objective is to ensure a smooth batton change from growth led by mining to growth led by something else," said Mr Eslake. "It looks as if mining investment will peak lower and sooner than had been thought. The Bank is running out of time to foster faster growth elsewhere.”

The budget cuts announced in October have added to pressure on the bank to boost economic growth.

The Australian Industry Group’s performance of manufacturing index slipped a further 1.6 points to 43.6 in November on a scale where anything less than 50 means the sector is shrinking.

The RP Data measure of national housing prices held firm in November after slipping 1 per cent in October, suggesting the October rate cut did little to spur the market.

Late Monday the interest rate futures market assigned a 92 per cent probability to a rate cut Tuesday, up from 83 per cent earlier in the day.

The bookmaker sportingbet.com.au would pay out only $1.22 on a $1 bet for on rate cut, compared to $3.25 for $1 bet on no change.

“It’s around what we would pay on Black Caviar winning its next race,” said spokesman Haydn Lane. “It’s about as close as you get to a certainty.”

The Australian dollar fell almost a third of a cent to 104.06 US cents Monday on the expectation of a rate cut Tuesday. Treasurer Wayne Swan welcomed the prospect of a rate cut saying it if happened a family with a $300,000 mortgage will be saving around $5,000 per year compared to when the Coalition was last in office.

In today's Canberra Times, Sydney Morning Herald and Age

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