Saturday 21 Apr 2012
Rate cut on the horizon; Record SUV sales
RBA Board minutes; New Car Sales
• The latest Reserve Bank Board minutes confirms that a rate cut is on the cards for next month provided inflation remains in check. “Slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for a further easing of monetary policy. The Board would have the opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices”
• The Reserve Bank Board members conceded that for the domestic economy “recent data suggested that output growth was somewhat below trend over 2011, despite private investment spending underpinning the fastest growth in domestic demand for four years”.
• Board members noted that while global growth was at “a below trend pace in 2012” there were still significant downside risks particularly given that “financial problems in Europe continued to be a potential source of adverse shocks to the world economy”.
• Robust car sales. New car sales rose by 4 per cent in March in seasonally adjusted terms after lifting by 0.2 per cent in February. Sales of sports utility vehicles hit record highs in the 12 months to March.
What does it all mean?
• It’s clear that Reserve Bank Board has certainly become more cautious on the outlook for the domestic economy. The latest Reserve Bank board minutes highlights that the case for a rate cut was compelling – especially given that Board members acknowledged that growth outcomes “were somewhat below trend”. Subdued retail activity, the higher Aussie dollar, and slump in home construction have been clear dampeners on growth.
• Interestingly the Reserve Bank is well aware of the importance of home construction in driving domestic growth. It seems that Board members spent considerable time examining the reason for the lack of housing activity. A rate cut would be supportive in boosting activity in the housing sector.
• While the minutes suggest that the Reserve Bank maintains an easing bias, the final hurdle to a rate cut next month remains the quarterly inflation data - released next Tuesday. In our view if the inflation result comes in at or below 0.7 per cent for the March quarter, it should provide the Reserve Bank with additional degree of comfort and allow policy makers to cut interest rates by 25 basis points. In fact we expect headline inflation to be of a much more subdued nature coming in around 0.5 per cent with underlying inflation at 0.6 per cent for the March quarter – in short providing the Reserve Bank with the valid scope to cut rates.
• Interestingly the downside risks to global growth were discussed and Europe remains the watching brief. Global growth is below trend levels and sovereign debt concerns emanating from some of the peripheral European economies like Spain seem to be once again gathering pace. The threat of contagion to larger economies across the European Union is a key concern and is another reason that the Reserve Bank would consider providing a modest degree of stimulus to the domestic economy.
• The latest set of car sales data is encouraging. In March, car sales recorded the best monthly increase in eight months is up 4 per cent on a year ago. Clearly the improvement in car affordability is the clear driver. Car affordability is at the best levels since the 1970s, and coupled with the recent rate cuts it seems to have prompted consumers to update their rides.
• Interestingly the strength in vehicle sales is due to strong growth in sales of sports utility vehicles or 4WDs. In fact sales of 4WDs rose by almost 20 per cent in March compared with a year ago. It is clear that Australians have a love affair with 4WD vehicles with one in every four vehicles sold in Australia a sports utility vehicle.
What do the figures show?
Minutes from the April 2012 Reserve Bank Board meeting
More RBA interest in housing
• “Members spent some time exploring reasons for the weakness in many of the indicators for housing turnover and building activity across Australia. They noted the apparent sensitivity of developers to the outlook for dwelling prices. New dwelling construction had fallen in the December quarter and there was little sign of a pick-up in building or loan approvals, though house prices had shown some signs of stabilising recently. While auction clearance rates in Sydney and Melbourne had picked up a bit of late, they remained below their average levels”.
RBA on bank funding costs
• “The Australian banks had taken advantage of the improvement in funding conditions to issue a large volume of secured and unsecured debt. Members were briefed on the significant fall in the relative cost of that issuance since the start of the year – around 50 basis points for a five year issue – which would help to alleviate the pressure of higher funding costs in coming months”.
Reasons for underperformance of Australian shares
• “Equity prices in the United States rose by a further 3 per cent over the month, with the S&P 500 recording one of its strongest quarterly rises, but the Australian equity market had not experienced similar increases in recent times. In part, this reflected concerns about a slowdown in China (with Chinese equity prices falling by 6 per cent over the month), but it also reflected the composition of the local market, with the (recently underperforming) mining and financial sectors having a significantly greater weight in the local index, and technology stocks a much smaller weight, than in the S&P 500”.
Weak domestic economy
• “For the domestic economy, members observed that the balance of recent data suggested that output growth was somewhat below trend over 2011, despite private investment spending underpinning the fastest growth in domestic demand for four years. They noted the sharp differences in performance between sectors and regions of the economy, and the considerable structural change that was occurring, as well as the soft overall conditions in the housing sector and the likelihood of significant fiscal tightening in the next few years. Despite the rate of unemployment showing little change for some time, it was apparent that labour market conditions had softened over the course of 2011”.
Rate cut dependent on inflation
• “The Board had eased monetary policy late in 2011. Since then members had lowered their assessment of the pace of growth somewhat. If slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for a further easing of monetary policy. The Board would have the opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices, as well as information on demand and output. Members judged it prudent to evaluate those data before considering a further policy adjustment”.
Global growth concerns
• “Members noted that the growth rate of the world economy was expected to be at a below-trend pace in 2012, with ongoing weakness in Europe and an easing in the pace of growth in China. However, growth in Australia's major trading partners, weighted by shares of merchandise exports from Australia, was expected to be around average in 2012”.
Europe the key focus
• “Financial market sentiment had improved further in recent weeks, following the progress that had been made in addressing the sustainability of the fiscal and debt positions in several European countries. Members noted, however, that these issues were far from resolved, and that Europe remained a potential source of adverse shocks in the future. Wholesale funding costs were tending to decline, though they remained higher relative to benchmark rates than in mid-2011, and corporations and well-rated banks were able to tap capital markets for funding”.
New car sales:
• New car sales rose by 4.0 per cent in seasonally adjusted terms in March, after rising by 0.2 per cent in February. It was the largest monthly rise in eight months.
• Passenger car sales rose by 3.3 per cent, while sports utility vehicles rose by 7.5 per cent while “other” vehicles (trucks, utes etc) rose by 1.4 per cent.
• Overall car sales are up 4.0 per cent on a year ago. Passenger vehicle sales are up 1.6 per cent, while SUVs sales are up by 18.4 per cent but “other vehicles” are down by 6.5 per cent.
• In rolling annual terms, 257,848 SUVs were sold in the 12 months to March – the highest reading in records going back 18 years.
What is the importance of the economic data?
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
What are the implications for interest rates and investors?
• CommSec still believes that the Reserve Bank should cut rates again, and we are pencilling a move next month. In short, economic growth is still below trend and inflation is well controlled. The Reserve Bank can inject momentum with few, if any, downsides for the economy.
Source: Savanth Sebastian, Economist, CommSec