The Week Ahead: Rate cuts a’ comin’

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By Andrew Nelson

Reporting season is finished and with it – for at least a short time – is the dread with which most investors began the month. The news, while average when viewed subjectively, was still better than most dared hope for, with the decidedly positive run last week dragging both major indices well above the 5000 mark.

On the surface this all bodes well, but I’ve got some bad news for you (and some good). 

Before I get into the nuts and bolts and talk about what’s happening and when this week, I’d like to set the tone, because on the surface, the nuts and bolts make for a pretty positive story.

We are entering September, and on the investor’s map of the year, this is the big, blank area labelled with “There, thar be monsters”.

What do I mean? September has been the worst performing month since, in fact, since the Dow Jones Industrial Average started pushing out ticker tape in 1896, the month has seen average stock losses of 1.15%, versus the average for the other 11 months of 0.75% on the upside.

Now let’s not get too scared about this because over the last three years this just hasn’t been the case. This could mean that as there is no underlying fundamental reason for the month to be so bad (Trust me, I’ve done a bit of reading on this and there isn’t), it could just be a statistical anomaly that the last few years have finally put to rest.

But if you look at the commentary , and I mean almost all of the commentary, it’s pretty clear the consensus view that the, sub-prime, credit-crunch, burst commodity bubble, US recession, local recession, global recession isn’t done yet. And just in time for September!

We thought US banks were recovering, the terrible twins were looking like they won’t need to be bailed and the outlook in the economy was looking like it was finally getting better. You really couldn’t have asked for a better way to end the month of August and that’s the view the average Australian investor had when he switched off his computer on Friday.

But Wall Street has its own Friday and it sure wasn’t the view US investors had when they went home for the weekend.

The Dow fell 1.5% in New York on Friday, buffeted by news of an unexpected big drop in personal income, while retail sales failed to continue the strong trend that began in July.

So, before I get to the good news, I figured I should just point out that the ride ain’t over and while hopefully, we’re on the last leg of the run, it’d be a smart idea to keep your seat belt on. What does it mean? The US consumer, who supports 70% of the economy is making less and so spending less.

Otherwise, investors sat it out as Hurricane Gustav continued to bear down on the Gulf Coast, while Americans otherwise packed their trunks (boots) and headed off on the end of summer long-weekend.

But really, let’s put all of this aside for now and focus on the matter, that is; the local market. Too many people can’t be that concerned about Wall Street on Friday, the SPI Overnight only lost 29 points. And there’s one big reason why.

Today sees not only the release of the Australian inflation gauge, but also the current account balance. CBA analysts are predicting the current account will have narrowed significantly from last quarter’s record 6.9% of GDP because of increased coal and iron ore prices, not necessarily supportive of massive interest rates cuts. But that’s not the reason.

There is also a number of other smaller business indicators, August PMI (that’s purchasing manager’s index), 2Q Inventories and the RBA commodity prices index.

But in reality, little short of the Japanese bombing Darwin again could see even a modicum of focus shifted from the RBA’s rate decision on Tuesday. The market waits with baited breath for confirmation from the RBA of the much hoped for 0.25% rate cut. Although there are still a few talking about 0.5% or more, at this point they are in a small minority.

While the rate cut is likely, the bank’s view on inflation will also be very important, as its previous stance was that inflation will remain above the target band until 2010. A dampener for those predicting an extended run of cuts.

It’s probably a fair assumption to make that 25 basis points seems almost guaranteed, but that investors will be closely watching the accompanying statement for hints and guidances about the immediate outlook for Australian interest rates.

Wednesday either brings us more proof of cuts to come or the possibility of a sobering slap in the face, with Q2 GDP data coming hot off the presses. Again CBA economists are expecting a mixed result, as Thursday’s capex data showed business investment remained, but it’s now a given that households shave been belted by high interest rates, petrol prices, resulting in a still palpable lack of confidence.

Thursday sees Trade Balance figures, which CBA expects will be similar to Monday’s current account numbers. With the cash minted on higher coal and iron ore prices flowing into the economy, it’ll be hard to keep a cap on prices.

On the equities front we’ve got little to look at but dividends, dividends and more dividends, although Felix Resources ((FLX)) and Sims Group ((SGM))  are set to straggle in with full year result on Tuesday and Thursday respectively.

Internationally, there will be a few things to keep an eye out for. In the US, construction and manufacturing data are out on their Tuesday (our Wednesday), factory orders and the Beige Book come out Wednesday, Non-Farm Productivity hits the bricks on Thursday and Friday sees August unemployment and Non-Farm Payrolls (which we can think about on Saturday) .

The Beige Book, or more formally called the Summary of Commentary on Current Economic Conditions, is always an interesting read, as it puts on paper the collected findings, thoughts and musings from each of the regional Federal Reserve Banks. It comes out 8 times a year and is, in essence, the Fed’s version of the state of the union.

In Europe, we’ve got EU PPI data on Tuesday (again, our Wednesday), EU GDP and retail figures as well as UK consumer confidence on Wednesday, which leads in to Thursday’s rate decisions from both the EU and the BoE. Both are expected to remain on hold. However, the market will be far more focused on the commentary, looking for confirmation of a deteriorating growth outlook in the coming months.

Japan Capital Expenditure comes out on Friday.

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