Friday, August 8, 2014

RBA warns - jobless rate could remain high until 2016

The Reserve Bank has signaled that Australia's jobless rate could remain high for the next two years.

In its quarterly update on the Australian economy, the central bank cautions that unemployment will be "elevated for some time yet" before gradually declining in 2016.

The RBA's statement released this morning was published taking into account yesterday's surprise increase in the official jobless rate to 6.4 per cent.

While the Reserve Bank was most likely surprised by the jobless spike for July, today's document reconfirms its broad expectations for a sluggish jobs market.

The comments also paint the picture of recent mixed signals in Australia's economy with headline inflation in the last quarter back at the top of the RBA target zone and the solid improvement in data such as retail sales.

"Some labour market indicators have improved a little since the beginning of the year, but overall conditions remain subdued," the statement says.

"Forward looking indicators of labour demand have generally improved since late last year, pointing to modest employment growth over the coming months.

"However, there remains a degree of spare capacity in the labour market."

The RBA also underscored to moving nature of the monthly employment report amid speculation that a changed measure of employment might be a factor behind the 6.4 per cent jobs rate.

"The measured unemployment rate has been quite volatile from month to month over the year to date," the statement cautions.

"This may in part reflect a notable change to the definition of unemployment in the month of July."

In recognition of the subdued outlook, the Reserve Bank has cut its economic growth forecasts slightly from 2.75 per cent in December 2014 down to 2.5 percent.

Growth is expected to recover by December 2016 when the pace could make a comeback as high as 4.25 percent.

In the same period, headline inflation has been downgraded from 2.75 per cent to 2 percent.

The slower outlook growth and inflation, combined with a subdued on jobs market could see the cash rate remain on hold for a longer period than many economists have anticipated.

However, today's statement is likely to reignite speculation that the Reserve Bank might cut interest rates again later in the year.

Thursday, August 7, 2014

Russia retaliates against US and EU with initial "light touch" sanctions

Vladimir Putin has retaliated to western sanctions imposed over Russia's support for rebels in Ukraine.

The Russian president has signed a decree limiting or banning imports of agricultural products from countries behind the sanctions push.

The Kremlin's response is clearly targeted at the United States and the European Union, but also Japan and Canada.

While Russia's measures are limited to fruit and vegetables, analysts expect tougher sanctions could eventually be imposed such as restrictions on the use of Russian airspace.

Here's my report from The World Today.

Rupert Murdoch says he is "resolute" in abandoning Time Warner bid

Rupert Murdoch has reassured investors that he won't be making another offer for the rival media company Time Warner.

The media mogul made a rare appearance on a results teleconference with analysts this morning to say he was "resolute" about the decision.

Here's my report from this morning's edition of AM.

Some might be skeptical about Mr Murdoch's resolve given that he usually gets what he wants when it comes to big deals.

But in addition to being a very successful survivor, Mr Murdoch is also a realist and knew he had to be upfront with investors.

It's now clear that the US$85 billion bid for Time Warner was seen as too ambitious and some investors worried he was paying too much.

That had caused a fall on the 21st Century Fox share price so when the deal was pulled yesterday, Fox shares rocketed - helped in large part after Mr Murdoch and 21st Century Fox offered a US$6 billion share buyback.

While Mr Murdoch was clearly disappointed and frustrated with the attitude of the Time Warner board, he had a lot to smile about this morning after 21st Century Fox reported a sharp rise in fourth quarter revenue and returned to profitability.

Saul Eslake warns Joe Hockey - your budget is in trouble.

One of Australia's most respected economists says Joe Hockey's budget is in deep trouble.

Saul Eslake, chief economist at Bank of America Merrill Lynch, says if the government's cost-cutting measures remain blocked in the Senate, the budget will still be in deficit by over $18 billion in 2017-18.

The most recent budget forecast a deficit is less than $3 billion in 2017-18.

While that's not necessarily enough to jeopardise Australia's AAA credit rating, Saul Eslake says it could leave Australia exposed to any global shock.

Here's what Dr Eslake told me on this morning's edition of AM.

Tuesday, August 5, 2014

Boring as the new black. No surprises from Reserve Bank with "on hold" rates decision.

Even by Reserve Bank standards, it was eye-glazingly dry and predictable document.

But of course no one was surprised with the outcome given that money markets had factored in a zero percent chance of rates excitement.

In keeping the cash rate on hold at the historic low of 2.5 percent, governor Glenn Stevens convinced any doubters that boring is - and probably has always been - the new black.

Underscoring a year of rates stability, Mr Stevens used a post-meeting statement all but identical to last month's version to say that any movement in rates will be telegraphed to the market over a reasonable period.

The many tea leave readers - market economists, academics, journalists - have learned through trial and error that the most telling information can sometimes be found right at the end of the governor's statement.

Today's statement did not disappoint when it became apparent that the final two paragraphs matched last month's word for word:

                                                              August RBA Statement source: Reserve Bank of Australia

                                                               July RBA Statement source: Reserve Bank of Australia

A few market economists had pondered subtle or micro changes to today's statement, even the small possibility that the reference to "period of stability" might be removed.

But now we know. One of the most bland statements from the RBA sets the scene for a continuation of Glenn Stevens' "no surprises" policy.

Mr Stevens flagged the board's intention to take a gradual approach to winding rates higher when he spoke in Hobart in July:

"Long before any thought were to be given to an increase in rates, it would probably be sensible for the Board to cease references to a future ‘period of stability’ and revert to the more normal formulation that the stable policy settings ‘remained appropriate’ or something like that. 

"Such an evolution would amount to no more than a recognition that a ‘period of stability’ had in fact already been occurring and wasn't entirely in the future, but wouldn't imply any particular change in the Bank's views about the future course of policy.

"It should go without saying that those seeking to understand our thinking should, in any event, look not just at the wording in the post-Board statement, nor just that in the minutes, but also at the whole analysis of the economy and the outlook in the regular Statement on Monetary Policy."

Taking Mr Stevens at his word, Friday's quarterly statement will be an important document in getting a flavour of where the RBA sees the economy heading.

But before that, Thursday's official jobs numbers from the Bureau of Statistics will be the next important factor for pundits who are united pointing to a flatlined jobless rate of six percent.

Full agenda at today's Reserve Bank board meeting; key focus on changed language in Glenn Stevens' post-decision statement

                                                                                Key words from Reserve Bank July statement  source: RBA

Today's meeting of the Reserve Bank board will be anything but a dull affair.

Since August last year when the cash rate was cut to the historic low of 2.5 per cent, RBA watchers have quipped about quick decisions and an early lunch.

But on this first Tuesday of the month, it's unlikely that RBA board members will find themselves enjoying a mid-morning stroll down Sydney's Martin's Place.

Listen to my preview from this morning's edition of AM.

While it's close to certain that the cash rate will be held steady, there'll be a full agenda given the improving face of Australia's economy.

Signs of rising inflation could put the RBA's inflation hawks on a war footing, given that the headline figure in the most recent quarter was back up to 3 per cent annualised - right at the top of the RBA's target zone of 2 to 3 per cent.

And expectations that the official jobless rate looks set to remain at 6 per cent will have some members thinking the worst might have passed.

We'll know for sure that the Bureau of Statistics reveals the closely-watched result for July on Thursday.

The momentum towards a "glass half full" economy is underscored by positive private data out yesterday on inflation and jobs, capped off by a surprisingly strong 0.6 per cent increase in July retail sales.

However, the elephant in the RBA boardroom this morning remains Sydney's booming property market and rising concerns that a dangerous property bubble is building.

So yesterday's warning from former RBA board member Professor Warwick McKibbin might well be resonating this morning - that the cash rate has been kept too low for too long.

Economists and other RBA observers will be scrutinising the statement from governor Glenn Stevens when the outcome is revelealed this afternoon at 2.30 (eastern).

Tea leave readers will be looking for any changed language, subtle or otherwise, that could be seen as a the beginning of the RBA's "softening up" process for an eventual rate rise.

All eyes will be on the key final paragraphs that have led many (including this reporter) to read such statements backwards, aware that the lead can often be buried.

The last statement in July ended with the assuring words for some that "on present indications, the most prudent course is likely to be a period of stability in interest rates."

A removal of that statement, or a subtle rewording, will have market economists on rate rise alert or at the very least debating just when the hard decision will be made.

A shift in language could and force the Australian dollar higher although it is now clear the RBA believes it has used all levers to tame the still bullish currency.

While the Reserve Bank is selective about considering private data, today's meeting coincides with the release of Dun & Bradstreet's business expectations survey which only adds to the optimism.

The survey says nearly half the businesses surveyed are expecting increased activity in the coming months and that the outlook for sales is at its highest level in more than a decade.

So it appears that the initial hostile reception to the Federal Budget appears to be fading with businesses and consumers in a much more positive mood and willing to hire and spend.

The Australian economy remains fragile in some quarters, but a global shock aside, the Reserve Bank has little choice but to start sending the message that the recent period of low rates and cheap money for borrowers is about to end.

Monday, August 4, 2014

Reserve Bank "shadow" board warns of housing bubble risks; says rates kept too low for too long

While it's close to certain that the cash rate will be held steady at the historic low of 2.5 per cent, there will be a full agenda given the improving face of Australia's economy.

Headline inflation in the most recent quarter was back up to 3 per cent annualised - right at the top of the RBA's target zone of 2 to 3 per cent "over time".

That's normally enough to put the RBA's inflation hawks on a rate rise warfooting.

But also the official jobless rate looks set to remain at 6 per cent when the ABS reveals the official July numbers on Thursday.

The trend towards a "glass half full" economy is underscored by positive private data out today on inflation and jobs, capped off by a 0.6 per cent increase in July retail sales.

However, the elephant in the RBA boardroom tomorrow remains Sydney's booming property market and rising concerns that a dangerous property bubble is building.

The Reserve Bank "shadow" board - a project run by the Australian National University - says inflation and rising asset prices will force the RBA's hand over the next six months.

The former RBA board member Professor Warwick McKibbin is a key member "shadow" board and I spoke to him earlier today.

Here's my preview of tomorrow's RBA board meeting which includes an interview with Professor McKibbin.