Now for one of the more important weeks for the Australian economy and share market in recent memory with the Reserve Bank poised to cut rates tomorrow and a Federal election in the offing.
The timing of the Federal election is now confirmed for September 7, meaning any cut in rates tomorrow will be in the midst of the campaign.
On top of this, there’s the release of some important data on retail sales, trade and jobs this week that will tell us more about the health of the economy, while the June 30 reporting season kicks up this week.
So, all in all the outlook for markets, investors and the economy generally for the rest of the year could very well be set this week.
Friday night’s weaker US jobs data (160,000 jobs created in July and 26,000 jobs cut from the two previous months) probably means the Fed’s tapering of its spending splurge won’t start until later in the year.
The RBA is known to be worried about the impact that might have, but markets around the world seem to be adapting to that possibility very nicely.
Ten days ago the chances of a rate cut were less than even money, but the possibility has hardened as more data showed the economy is weaker than thought, leading to last Tuesday’s speech from RBA Governor Glenn Stevens where he laid out his thinking on the strength of the economy as it makes the transition from the resource investment boom to growth generated by domestic demand, especially in housing and construction.
Australia 2Y Interest Rates – Another Cut On The Way?
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Mr Stevens took a gloomier than expected stance on the economy and its progress in last week’s speech – in the process he talked about the value of the dollar and warned that economic activity would be lower for longer – and that included interest rates.
"Interest rates are likely to be lower in such a world than they were in a world in which households were extending their finances. This is a global phenomenon, but it holds in Australia too," he said. And he gave the biggest hint that rates could come down, again
"We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment."
Those comments firmed up chances of a rate cut – the best bet is 0.25%. But if there was to be a cut of 0.50%, I wouldn’t be all that surprised.
The Federal government’s mini budget/update on Friday made it clear there would be little new spending to allow fiscal policy to support the current record low rates as they support activity in the economy. So with that off the agenda, it’s down to monetary policy.
Economists at the National Australia Bank now see two further rate cuts instead of the single cut they had been predicting for several months. The AMP’s chief economist Shane Oliver said at the weekend he sees a rate cut tomorrow.
"Since the last RBA Board meeting we have seen more weak readings for consumer and business confidence, a further rise in unemployment, benign inflation and more uncertainty regarding the outlook for China.
"With the economy still struggling and budget uncertainty escalating, more monetary stimulus is needed. This should ideally come in the form of both lower interest rates and a lower $A. Following a relatively dovish speech by Governor Stevens in the last week the money market has priced in a 90% chance of a rate cut," Mr Oliver said.
The Aussie dollar fell to 89.05 USc at the close of business early Saturday and dipped to a new three year low of 88.71 during trading in the US.
As well as the retail sales data for June and the June quarter, out today, we will see the release of the June quarter’s house price index tomorrow from the Bureau of Statistics, trade data as well tomorrow, housing finance on Wednesday and the July jobs data on Thursday – so it will be a big week for assessing the heath of the economy, without the RBA meeting.
Forecasters are now predicting 15,000 or more jobs will be lost in the jobs report with the rate climbing towards 6% (the mining budget pushed the government’s jobless forecast up to 6.25% from 5.75% for the current financial year).
Now that meeting will also consider the latest updated forecasts from RBA staff on the economy and that will be outlined in the third quarter’s Statement of Monetary Policy to be released on Friday at 11.30 am. That will be the key set of forecasts for the economy for the election campaign.
Other data this week will include the performance of services index, industry car sales for July, job ads (from the ANZ for July) and the monthly inflation figures from TD Securities/ the Melbourne Institute.
