Once again investors and traders in local financial markets have gotten all excited about the prospect of official interest rates remaining at their current record low levels for longer than expected.
That’s what we saw yesterday with the value of the Aussie dollar dropping half a cent at one stage, with most of the fall coming after 11.30 am when the minutes of the latest RBA board meeting at the start of June were released.
The minutes also helped to steady the local stockmarket after a weak start off the back of another fall in iron ore prices (to $US89 a tonne).
If you think that sounds a bit like Monday’s trading – you’d be right after a speech by the head of the RBA’s economics department pointed out that unemployment would remain at current levels (close to 6% or a bit more) for longer than expected – well into 2015.
That in turn wasn’t new news because the RBA has been telling the market for a while that unemployment will remain around current levels for quite a while. Nor should it be seen as new news because RBA Governor, Glenn Stevens made similar remarks in his post board meeting statement earlier this month.
And again that shouldn’t really be a surprise because the minutes released yesterday mirror what Mr Stevens said in his release.
And yet investors, traders and business media, time and again go and get all excited and the dollar’s value moves and the stockmarket indexes bounce around.
The fact remains the economy remains sluggish (and the RBA now believes that the impact of the Federal budget will continue to dampen government spending for several years to come).
The bank said of the budget that, “The budget implied a more substantial fiscal consolidation than had earlier been projected”.
In other words, the bank now sees the impact of the budget’s spending cuts and changes to outlays will be deeper than it had been expecting (it is already on record as saying the contribution to growth from the public sector in the next year will be the lowest in 50 years, with many states cutting spending).
RBA reminds markets (again) rates steady for a long time yet
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Yesterday’s minutes reminds readers of the RBA’s earlier forecast that the year to the end of March, when growth hit an annual 3.5% was as good as it’s going to get, at least until 2016.
"Following strong growth in January, growth of the nominal value of sales had slowed over the three months to April, and the Bank’s retail liaison suggested that growth had moderated further in May,” the RBA said.
The likes of Super Retail, Noni B, RCG Corp (Athlete’s Foot) and The Reject Shop are already confirming the impact of the warm autumn, and then the impact of the budget’s cuts on consumer confidence and spending.
Now the RBA is saying that retailers large and small it talks to have told it that sales growth slowed or fell in May thanks to the impact of the budget coming on top of the weak growth because of the warm weather.
But the RBA is wary of taking too much notice to the immediate budget-induced dive in consumer confidence.
"Measures of consumer sentiment had fallen sharply over the past month and were now below their long-run average levels.
"However, it was noted that while low-frequency movements in confidence measures had been broadly associated with trends in consumption spending, there was little evidence from the historical record that high-frequency movements carried much predictive content,” the RBA said.
For that reason, plus the continuing transition from the resources investment boom and the sluggish labour market, the RBA again made clear the current record low level of interest rates will be with us for a while yet.
"Low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation. Those uncertainties were likely to take some time to resolve,” the RBA said.
But no doubt when there’s a big speech from senior RBA officials, as there is later this month and in July, and after the next board meeting of the bank on July 1, market watchers will warble on about the timing of rate rises (or falls in isolated cases) and the dollar will rise/fall and the stockmarket will bounce around, again.
The minutes contained another small commentary on the value of the Aussie dollar which should have been following iron ore prices lower (down 34% this year so far). But it is up by around 1% from the June RBA board meeting and on several occasions has topped the 94 USc mark for the first time in seven months.
The dollar won’t lose much value until demand from offshore slows or falls, which with yields on 10 year bonds around 3.75%, won’t be for a while.
