Wednesday, 29 February 2012

RBA Commodity Price Falls Continue

Busy day.  The RBA monthly commodity price series confirms further commodity price falls.

In Australian dollar terms, the RBA Index of Commodity Prices fell 1.3% in February and is now 11.5% below the August 2011 peak.  The index is at its lowest level since December 2010.  That said, commodity prices are still at elevated levels.

The commodity price news confirms, at least to some extent, an over-valuation of the Australian dollar, a point hinted at by RBA Governor Glenn Stevens when last week he noted the divergence between the falling terms of trade (largely commodity prices) and the still strong Australian dollar.  The Australian dollar look overvalued on several fronts, but as we all know, market mis-pricing can, and often does, last quite a long time.

The House Price Data In Context

Just to clarify a point:  RPData chose to release two monthly data readings simultaneously today as they promoted their daily house price series.

Had they retained their previous schedule, today would have seen just the January data released and this showed a sharp 1.0% monthly fall in house prices.  In releasing the data for February, RPData gazumped the 1.0% fall with the February information which showed house prices rising 0.8% in the month.

Netting this out, house prices fell an average of 0.1% in each of January and February and the trend for prices is still down.  

Australian House Price Falls Continue, But Business Investment Booms

The trend fall in house prices in Australia was sustained into the early months of 2012. 

The RP Data house prices series confirmed a 1.0% fall in prices in January which was only partly offset by a 0.8% rise in February.  Even allowing for the mini-uptick in February, house prices remain around 5 ½% below the peak level of late 2010.  While this fall in house prices is not acute, it remains disconcerting.

It will keep the RBA with a firm bias to cut interest rates at some stage in the next few months. 

Household debt in Australia remains very high and skewed towards mortgage debt.  This means that banks who provide the bulk of that mortgage debt will be a little worried about these sorts of  falls in house prices and the resulting risk of greater negative equity for some borrowers.  If house prices were to fall another 5% or 10%, the problems for householders would be quickly expanded to the banks.  

In massive contrast to the house price weakness, private sector CAPEX is booming.  It has risen by 30% over the past year and the expectations data point to a further 25 to 30% rise into 2012-13.  The growth in business investment is based mainly on the mining and resources boom, with manufacturing and others, mainly services, lagging behind.

It is these sorts of numbers that are giving the RBA increasing confidence about the economic outlook and show yet again the multi-speed or patchwork nature of the economy.

Overall, the news works to keep the RBA on rate cut watch.  The downside risks from weaker house prices presents significantly more downside concerns than the upside risks from the mining boom.  There is probably not enough in the house prices data to move the RBA to cut rates next week, particularly given the unrelenting expansion in investment, but it will remain on edge.

Global issues remain the main driver of RBA policy for now.

Tuesday, 28 February 2012

Soft Data Keeps The Door Open for Interest Rate Cuts

A slurry of top tier data today paint a picture of weak credit, weak housing and still soggy retail sales.  These trends have been evident for a while and are probably not a massive shock to the RBA, although they leave the possibility of an interest rate cut alive.

Each of today’s indicators is important in their own right: the fact that all of them are erring on the side of weakness makes the situation problematic. 

Just to reiterate:  Housing credit growth rose 5.3% in the year to January – the weakest growth in this indicator in almost 35 years.  Personal credit fell 1.4% in the year to January and has fallen in 8 out of the last 10 months.  Business credit fell in January but is 1.2% higher over the year. 

Retail sales, which make up around one-fifth of GDP, rose 0.3% in January, but this follows monthly changes of a 0.1% fall in December, no change in November and a rise of 0.1% in October.  In the last four months, retail sales have been very soft with next to zero growth.

On credit and retail sales, it looks like the consumer funk of the last couple of years continued into 2012, notwithstanding the 50 basis points of interest rate cuts in the latter months of 2011.

There was also a 7.3% fall in new homes sales in January, confirming just how sluggish the interest rate sensitive housing sector is.  

In other news, construction work done also fell a hefty 4.6% in real terms in the December quarter, but it must be noted this followed a sharp rise in the previous quarter.

The case for easier monetary policy remains strong, although the RBA still has a bee in its bonnet about the mining boom, a tight labour market and improving global economic and market conditions. 

A rate cut could be delivered at any meeting – a cut in February would not have been out of place given the run of recent data and the now bubble-ish Australian dollar.  Whether the RBA cuts in March is not at all clear.  There is no doubt it could (should) cut interest rate without fuelling a lift in inflation.  This judgment is shared by many Board members, but whether the news between the February RBA Board meeting and now is sufficiently soft for that judgment to spread to the doubting Thomas' on the Board will be revealed on 6 March.

Sunday, 26 February 2012

Gillard surges ahead of Abbott

On Centrebet, Prime Minister Julia Gillard is $1.28 to be Labor leader at the time of the next election.  These very short odds no doubt reflect her convincing win in the leadership ballot.   Given the size of that win, and considering Kevin Rudd’s concession speech, these odds may even understate the strength of her position.  She perhaps should be $1.05 or so.

Interestingly, the Leader of the Opposition Tony Abbott is $1.36 to hold on to his role by the time of the next election.  For those not familiar with bookies odds, this means that Mr Abbott is more likely to be dumped as leader of the Opposition than Ms Gillard is to be replaced as Prime Minister ahead of the next election. 

Interesting to see how these odds trend over the next little while.

PM Gillard goes back to her office and ...

The Prime Minister Julia Gillard is about to return to her office in Suite MG 08 in Parliament House, Canberra, no doubt a little deflated by the experience of having to dispatch Mr Rudd to the backbench, but also relieved with the fact that she has locked in her authority as Prime Minister until the next election.

As Ms Gillard settles into the work at hand, she’ll need no reminding of the following facts:

  • Unemployment is 5.1% and it looks like staying low for the next year or two.
  •  GDP growth is 2.5% and on track to lift to 3% or a little more in the second half of 2012.
  • Inflation is 2.5% and has been in the RBA’s target range for almost two years.
  • Real wages continue to rise, locking in a decade of rising living standards and rising purchasing power for consumers.
  • The official cash rate is 4.25%, having been brought down from 6.75% when the Coalition lost office in 2007.
  • The standard variable mortgage interest rate is around 7.4%, down from 8.55% when the Coalition lost office in November 2007.
  • The 3 year fixed term mortgage rate, for those interested, is currently around 6.0%, down from 8.2% when the Coalition lost office in November 2007.
  • The Budget, to be delivered in 10 weeks, will deliver a surplus in 2012-13 and there will be surpluses in each of the out-years.
  • Net government debt is peaking below 9% of GDP and in four months time, will start to fall.
  • The company tax rate and personal income tax are going to be cut in a few months.
  • Pensions are about to rise.
  • Superannuation contributions are scheduled to rise.
  • Australia still has its triple-A credit rating by all three major ratings agencies.

Overall?  Not a bad scene to walk back to.

I would hazard a guess that just about every other Prime Minister or President anywhere in the world would swap their circumstance for these.

More Odd Data Analysis

Curious how the two party preferred vote of around 54% to 46% in recent polls, 18 months out from the election, makes the Coalition all but certain to win the next election but Rudd getting one-third (about 33%) of the Caucus vote to Gillard's two-thirds (67% or so) leaves him competitive to challenge down the track.

Let's see the result a little after 10am today but a one-thrid/two-third split in the leadership vote is a slaughter.

Friday, 24 February 2012

Reading the Poll Data Badly

One observable thing about looking at the economy and financial markets over the past 25 years is that not many people are all that good at reading data and even those who are very good occasionally mis-read the information that is included in what is hard numerical news. 

The raft of opinion polls today show that Mr Rudd is preferred leader of the Labor Party.  There is no doubt about that.   But the headlines surrounding the findings are skewiff and other more important data are not being properly analysed by many people, if any.

Let’s start by looking at the question that matters – the two party preferred results.  The average of the polls today show the Coalition at 53 or 54%; Labor at 46 or 47%.  There is no doubt that if repeated at an election, the Coalition would win very comfortably.

But the question that I have not seen asked is how much of this result is influenced by the 18 months of Mr Rudd white-anting, sniping and leaking?  In other words, if Mr Rudd had done the right thing and left Parliament at the 2010 election and slipped into the backdrop, what would the polls be showing?

I cannot but guess the impact.  Is Rudd’s petulance and bastardry worth 2%?  3%?  4%? 5%? to the Coalition vote?  I don’t know, but it is a positive number for them.

What we do know is that in the 2010 election campaign, the polls were showing Labor ahead 54% to 46% or so when the election was called.  This moved dramatically with a whopping 5% swing to around 49% to 51% in the aftermath of the Laurie Oakes leaks.  There’s a 5% jolt from that.

Based on a working assumption of a clean air, Rudd-free agenda, the polls would, I suggest, be close to 50% to 50% right now.  My guess is that Rudd is adding 3 or so points to the Coalition vote.

Looking at the poll numbers today must take account of that influence.

Mr Rudd is like the proverbial arsonist who, having lit the fire, wants to don the firefighters outfit and ride to the rescue to put out the fire.  It would clearly be a different scene had he not lit the match in the first place.

With 18 months until the next election, there is still a lot of time for the Gillard Government, free of the Rudd ball and chain, to return the focus on the wonderful position of the Australian economy, the budget surplus, low unemployment, education reform, carbon price, MRRT, disability insurance, Australia hosting the G20 meeting in 2014, low inflation, company tax cuts, superannuation increases and the like. 

There are two Budgets in that time as well to add to the policy agenda

We know from the Essential Research findings this week people like the bulk of the policies of the Gillard government by margins of up to 20%.

If Prime Minister Gillard can approach these items plus the agenda for the next 18 months without the destabilization of a bitter Mr Rudd, she still might win the next election.

Thursday, 23 February 2012

Laurie Oakes - you can put an end to it

Journalists never (rarely) reveal their sources, especially when they get a blockbuster scoop.  It is unreasonable to expect them to do so, because the risk is that future "sources" will never trust them and they will miss out on that next scoop.

That said, in the current Labor Party leadership ructions, the sage of the Canberra press gallery, Laurie Oakes could, if he wished, change the course of Australian politics.

If Mr Rudd was in fact responsible for the hugely damaging leaks to Mr Oakes during the 2010 election campaign (Deputy PM Mr Swan said "he (Rudd) sought to tear down the 2010 campaign") and if Mr Oakes confirmed this, Mr Rudd would be outed and be forced out of Labor leadership contention for ever.  His milky bar kid cuteness and good fella persona would be exposed as a facade.

Other journalists could also come clean and outline Mr Rudd's white-anting actions since he was tossed out - the truth would once and for all flush out Mr Rudd, undermining his remaining credibility.

With the Rudd destabilisation gone, Prime Minister Gillard could then get back to the job of governing without the periodic hand grenades being lobbed at her from within.  It would not be impossible to consider that with 6 months of clear air, without friendly fire, she could refocus the government's messages on the brilliant economic conditions, the May Budget and the policy agenda that most people seem to like and it might just see the government move somewhere close to being competitive at the next election.

Mr Oakes' silence will help Mr Abbott win the next election.

My guess is that it's unlikely we'll see Mr Oakes or any other journalist confirm Mr Rudd's destabilising actions.  As mentioned, it probably isn't reasonable to expect them to do so.  But if they did, it would help to end a drama that risks spoiling the fantastic position Australia is in at the moment.

Wednesday, 22 February 2012

A political scenario for the Labor Caucus to think about

It’s September 2013.  Treasurer Joe Hockey calls a press conference in which he outlines the Budget Outcome for 2012-13.  It confirms a $7 billion surplus.  Treasurer Hockey takes the opportunity to update the Treasury projections for the Budget surpluses out to 2015-16. 

The solid US economic recovery, a slightly better performance in the Eurozone and an upswing in GDP growth in both China and India means that in each of the three years in the forward estimates, budget surpluses in excess of $10 billion are predicted.  GDP growth is projected to hold around 3.5% and the unemployment rate is forecast to fall to 4.5%.

Mr Hockey claims credit for this beautiful set of numbers.

Mr Hockey says; “this is the stuff of the Coalition Government.  We have been in power for less than 6 months and already we are delivering on our promise to run Budget surpluses.  We are paying off Labor’s debt and we will lock in a scenario where this government pays its way.”

One sharp press hack asks; “But Mr Hockey, none of your plans to cut spending or to tighten the Budget are in place yet.  How can you claim credit for this result?”

Mr Hockey replies; “look David, we are working hard to fix the budget and what you are seeing are the early rewards for that effort.  We will deliver a Budget surplus every year in this term and that is why we are superior economic managers to Labor.  Unemployment is below 5%, we are running surpluses of $10 billion each year and we are fixing the Australian economy that was wrecked by Labor.”

This scenario unfolds due to Kevin Rudd resigning from Parliament which forced a by election for his seat in Griffith.  Mr Rudd’s resignation speech includes an assessment that he cannot remain in Parliament in the current circumstances and he will have a break before working out what he will do in future.

Labor get smashed in that by election with a swing of 11%.   The new member for Griffith, Campbell Newman who sensationally lost his bid to enter State Parliament in March 2012, failing by 55 votes to win the State seat of Ashgrove, saw a vote of no confidence succeed in the week he entered the House of Representatives.  A Federal election was of course called forthwith.

In breaking news, Prime Minister Tony Abbott has appointed Kevin Rudd as Secretary General to the United Nations, a post he will take up at the beginning of 2014.

Newspoll shows the Coalition leading Labor 55% to 30% on the question who is a better economic manager.

The bookies odds for the 2016 election has the Coalition at $1.05, with the ALP at $9.00.

Tuesday, 21 February 2012

Wages growth remains in the groove

The Labour Price Index (LPI) showed a rise of 1.0% in the price of labour in the December quarter, leaving the annual increase steady at a near optimal 3.6%.

The data confirm that wages growth remains at a not too hot, not too cold but just right level.  From an inflation perspective, wages growth is well contained, reflecting many things, not least the degree to which labour markets can react to changing circumstances.

The growth in labour prices fits well with the evidence of a softening in employment conditions, including the slight rise in the unemployment rate through 2011.  Recall that as recently a year ago (the year to December 2010), the LPI rose 3.9%.

But it is also worth looking at the wages data from a longer run perspective.

  • The annual rise in labour prices has been below 4% since June 2009. 

  • The long run increase in labour prices is 3.6%, exactly the level recorded through 2011.

It is also interesting to note that the only time annual growth in labour prices has been above 4% in the last 15 years or so was the period between June 2005 to March 2009 (with the odd quarter where it dipped to 3.9%).  This coincided with a low unemployment rate, but also it was when Workchoices was in place or then was unwinding. 

It is not clear what all of this means other than the current labour market regulations are delivering a low unemployment rate (around 5.25%) with moderate but sustained increases in nominal and real wages.   

Monday, 20 February 2012

Bank funding costs and margins - hopefully an easy guide

Analysis of bank funding costs and margins is a little hairy so I thought it might be useful to lay out how things stand.  A lot depends on when you start the comparisons or indeed, whether you are trying to get to the critical point in all of this - the banks margins rather than just an absolute assessment of costs.

Since the middle of 2011, overall bank funding costs have risen sharply mainly due to the surge in wholesale funding costs which make up about 40% of their funding.  But since late 2011, bank funding costs have fallen in absolute terms as the RBA interest rate cuts, lower deposit rates and a very recent lowering in wholesale funding rates have started to impact.

Bank lending rates have fallen too - compared with November, the standard variable mortgage interest rate is around 41 basis points lower.  Other term deposit rates and some business lending rates are also lower.

The net margin - between funding costs and lending rates - has narrowed.  And don't take my word for it, but the collective wisdom (and data base) of the RBA.

In its Minutes of the February Board meeting it noted and I quote it at length (I have bolded the exciting bits):

"the spreads at which bank debt was issued were significantly higher than in the middle of 2011. The Australian banks had issued sizeable amounts of covered bonds in a number of offshore markets in recent weeks at these higher spreads. Furthermore, the cost of swapping funds raised in offshore markets into Australian dollars had increased in recent months. There had also been two large issues of covered bonds in the Australian market, which had repriced the local bank debt curve significantly higher. Over the same period, Australian banks continued to compete actively for deposits, which resulted in the reductions in most deposit rates not fully matching the recent reductions in the cash rate. Collectively, these developments had increased banks’ overall cost of funding relative to the cash rate and had narrowed the difference between banks’ lending rates and funding costs."

Enough said?  That'll do me!