The odds have firmed for an interest rate rise next week for the first time this year and there's an increasing chance that there could be another rise by the end of the year.
Only a plunge in financial markets over the next week will stop the increase.
And did we see something like that overnight with the Macquarie Fortress Fund surprising with losses, a big US home lender heading for bankruptcy and losing billions of dollars, and two mortgage insurers in the US losing $US1 billion in the sub-prime mess?
Wall Street fell sharply at the end, despite good economic news, higher oil, copper and gold prices and a solid rise in European shares. US bond yield fell quickly as investors again sought safety after a day and a half of relative calm.
In Australia, Macquarie Fortress didn't have any sub-prime bonds in its two funds, but it says it's been caught up in the spillover from the sub-prime market.
Its losses could be as much as $300 million and it joins Basis Capital and Absolute Capital in being caught up in the fallout from the roiling sub-prime disaster.
The news of this and the latest problems from the US will unsettle markets and investors but so far there's nothing to prevent interest rates rising after the Reserve Bank board meets next week.
So why is a rate rise on the cards?
Well, there's those bad inflation figures we had last week, but there's also more.
Yesterday's National Australia Bank's quarterly survey was very bullish, as was thesharp, 7.5% rise in building approvals in June which was driven by units and apartments.
The NAB survey showed record levels of confidence and optimism, to go with the strong levels of confidence shown among small and medium businesses on Monday.
The NAB said that Australian businesses expectations rose even more strongly for conditions in both the next quarter, and the next twelve months. (See story below)
"The Quarterly Business Expectations Index for the September quarter rose by 7 points to 30 index points and for the year ahead was upgraded by 4 to 38 index points – the highest on record and for over 12 years, respectively.
"The Trading Conditions Index was at 26 index points in the June quarter – unchanged for three quarters and at the highest level for over ten years; expectations for forward orders over the next three months rose by 2 points to 15 index points – its highest level in 5 years and the Employment Index was unchanged at 12 index points in the June quarter with employment expectations for the next 12 months improving another 3 points to 28 index points – the strongest level on record."
All very solid, but there was something more important so far as the RBA is concerned.
It was the Reserve Bank's own credit figures for June which showed some of the strongest growth since the late 1980s property splurge.
The sharp rise of 1.5% in private credit, and the 3.6% rise in personal credit could have been driven by the changes to superannuation from July 1 as investors cashed up and borrowed billions of dollars to invest in super funds and other end of financial year schemes.
The Reserve Bank mentioned that as a possible explanation, but it was a strong rise nevertheless at the end of a year of pretty solid growth in credit, to reflect the improving economic conditions, especially in the June half.
But if super was the driver in June, there should be an equally sharp drop in credit growth this month.
The rise in apartment approvals could also have been linked to the usual end of financial year rush to get approvals of investor financed property.
This would also mean that there should be a slowdown this month. We have in fact seen this three times in the past year or so: a surge in apartment approvals and a fallback the following month.
But the question now for the RBA is not 'do we wait to see if these strong rises were a one-off'', it's more 'that was the final straw, let's move to be safe'; especially after the sharper than expected rise in March quarter inflation and the way price pressures seem to be embedded in parts of the economy.
RBA Governor, Glenn Stevens, has said recently that the bank has 'time' to wait and see what happens in the economy before moving on rates. These June credit figures, one-offs or not, have cut that wriggle room considerably.
The rise in credit of 1.5% was the highest monthly figure since September 1988 and the 3.6% rise in personal credit was the highest since November 1989.
Both, it should be remembered, came after the October 1987 stockmarket crash and were on the eve of the sharp recession and plunge in property in particular. The property market isn't as overheated as it was back then, but the RBA will not be taking any chances.
The RBA said yesterday:
"Total credit provided to the private sector by financial intermediaries rose by 1.8% over June 2007, following a rise of 1.3% over May. Over the year to June, total credit rose by 15.4%.
"The household component of credit rose by 1.8% over the month, which was significantly higher than in preceding months. This outcome appears to have been boosted by households borrowing to fund superannuation contributions ahead of rule changes at the end of June.
"Over the month of June, M3 grew by 2.4% and broad money by 2.3%. Over the year to June, broad money rose by 14.1%."
As well, the figures show that housing credit rose 1.5% in June, taking the annual rate to 13.2%, personal credit surged 3.6% cent to an annual rate of 15.3% and business credit accelerated 1.9% to an annual rate of 18.7%" (that was also a recent high).
The ANZ said in a statement from its economics department that the data indicated the underlying trend in household and business credit growth remain
