A small, but significant bit of good news yesterday amid all the doom and fear.
The resources boom is still paying off for the country as a whole, judging by the latest trade figures for August.
The best trade surplus in 11 years is just the sort of news to give a bit of encouragement, even to the Reserve Bank as it approaches next Tuesday’s board meeting and probable rate cut.
A quarter or half a per cent is the best guess: no cut at all is being discounted by the market.
It could very well hinge on any vote in the House of Representatives this weekend. A no vote would be bad and a rate cut as large as possible would probably come quickly and around the world, with more liquidity being injected by central banks to absorb the shock.
But let’s hope it doesn’t get to that. The nice black ink in our trade account is something we should have time to enjoy.
With the Aussie dollar down last month and a 6.1% rise in the Australian dollar value of the Reserve Bank’s Commodity Price Index last month (after a revised upwards 8% rise in August), there’s every chance the surge in national income and our terms of trade will keep trickling in.
But the slowdown globally means it will stop sooner, rather than later.
A 6% rise in exports (thanks to those higher prices for iron ore and coal) and a drop in imports (thanks to lower oil prices) saw Australia post a $1.36 billion surplus.
According to the Australian Bureau of Statistics, it was the second surplus in the past three months after revisions.
The seasonally-adjusted trade balance compared to the revised $697 million deficit in July and was far better than the $200 million surplus forecast by most in the market.
It was a turnaround of $2,061m on a revised deficit in July 2008.
It was the first surplus since April 2002 and the second largest since records started back in 1971, topped only by the June 1997 surplus when the Asian crisis was on.
The jump in exports partly reflected a 26% increase in coal exports, while the 25% plunge in oil prices saw imports down 2% in the month, assistance by a sharp 23% fall in electrical imports.
"The seasonally adjusted surplus was primarily due to the strong rise in non rural and other goods credits and the fall in fuels and lubricants debits," said the ABS.
Exports hit a record $24.6 billion in the month, up nearly $1.5 billion while imports tumbled by almost $600 million to $23.2 billion because of the fall in oil prices.
Two months ago a surplus this size would have worried the RBA into holding off on a rate cut and even thinking of a future rise, but the global credit freeze and slowing industrial production and sentiment here, in the US, Japan, Europe and Britain, calls for a different response.
Reluctant banks and high interest rates here in the markets will start having an impact on activity, so the strong injection of higher export receipts is now welcome news.
Inflation is no longer a priority for any central bank: in fact there might be one or two thoughtful bankers wondering about deflation should this continue for the next quarter, even if the bail out package is passed.
This week’s retail trade figures for August were trend only and showed a small rise, but because they are no longer as accurate as before July, they should be not taken as gospel until the more accurate quarterly figures come next month for the September three months.
The building approvals this week worsened and there’s no doubt demand for credit and the availability of housing credit are falling.
So with the current volatility, there’s reason enough for the RBA to cut by 0.25% and some justification for a 0.50% cut.
Some commentators say there’s a good chance that will happen, others aren’t so certain.
Economists at Goldman Sachs JBWere are in the latter camp.
Here’s what they wrote yesterday.
After recent financial market developments, the market is pricing a 50bp rate cut in October as all but a certainty (90% probability). We discuss our decision to maintain our forecast for a 25bp cut and outline what could cause us to change our view.
Despite market pricing we currently put the probability of a 50bp rate cut at 40%. We acknowledge that:
* Even after a 50bp cut, financial conditions would still be restrictive – The outlook for global growth and commodity prices has weakened
* Australian banks may choose to withhold the full impact of an RBA rate cut onto mortgage rates, reducing its effectiveness
Provided money market spreads continue to recede, we do not believe a decision by the banks to withhold an RBA rate cut can be fully justified.
We highlight that the interest rate mismatch in banks portfolios means that banks are better able to absorb elevated money market spreads during an easing cycle than during a tightening cycle.
The bigger consideration for the RBA is the risks to economic growth if term funding markets remain closed to banks for a considerable period of time (a definite possibility if US authorities fail to pass the TARP bill). The economic cost of this outcome would be enough to justify a large and rapid easing.
We note that this probably does not reach a critical point until after the November rate meeting, allowing a longer time frame for the RBA to assess the credit environment.
Our central view remains that the RBA will cut rates by only 25bp next Tuesday. This view is predicated on:
1. An easing in levels of distress in Australian money markets which will alleviate the pressure on domestic banks to withhold the full impact of any RBA rate cut.
2. That an amended version of the Troubled Asset Rescue Plan (TARP) bill will shortly pass through both Congress and the Senate.
