FYI | Oct 23 2006
By Greg Peel
Newbie RBA Governor Stevens has indicated that the decision to raise rates in November will be determined by the release of the September quarter inflation figures. He is also concerned the labour cost figures are not showing up in the GDP correctly, or at least on a timely basis, so this brings pressure back to bear on the inflation numbers.
While economists expect the inflation numbers to grow, that growth will be offset by the fall in fuel prices, so it’s a matter of just how little they’ve grown since June.
Today has seen the release of the producer price index (wholesale prices). According to the Australian Bureau of Statistics the final stage producer price index (PPI) rose one per cent in the September quarter, for a full year increase of four per cent. The figure was clearly above market expectations and may indicate the more important number – the consumer price index (retail prices) – is likely to surprise on Wednesday. HSBC, for one, is tipping a CPI rise of 0.6% compared to 1.6% last quarter.
This will still leave annual inflation at 3.6% (down from 4%) which is still well over the RBA’s 2.5% comfort top and enough to invoke a rate rise in November, says HSBC. Were core inflation to fall, the economists believe it would not make any difference. To avoid a rate rise, the CPI would have to be surprisingly lower.
Commonwealth Research doubts it will be, given it is tipping a September figure of 0.9%. Rising food prices (which are only going to rise higher as drought effects are felt) are the main contributor. Comm Research thinks the rate would have to come out at less than 0.5% for Stevens to consider not raising.
Macquarie Bank thinks 0.6% is the cut-off, below which the RBA will not raise. Above 0.8% it’s a given, the economists suggest, and in between it becomes a difficult decision. All in all it looks like a number to be anticipated with baited breath, but the weight of argument is for November to see more pain.
HSBC thinks the November rise will probably be the top, unless GDP growth does not slow as expected. 2007 may yet bring another hike if that is the case.
Australia is unusual in that mortgage rates are set off the cash rate and not the bond rate. That is why the inflation numbers are so important. In practice, this is ludicrous. By comparison, US mortgages, which tend to be 30 years in duration, are set off the 30-year bond rate. Few mortgages in Australia are sold for one day – in fact most are 20-25 years – so it’s no wonder banks do rather well when the cash rate goes up.
There are so many ways in which New Zealand shows up Australia, so there’s no point in going into them now, but one is that cash rates have little bearing on mortgage rates given most Kiwis borrow fixed for long periods. Given the NZ economy is now ticking along “briskly”, as HSBC has put it, expectation is for another 25bp rise on Thursday to take the cash rate to 7.5%.
Macquarie is not so sure, believing a rate rise to be about 50/50 at this stage. While the CPI release may have an influence, it is not as important a driver as the Aussie CPI is.
There is little disagreement that the Fed will not raise rates in the US on Wednesday night, retaining 5.25%. As economic growth subsides, the Fed is pretty happy with rates at the moment, and the market is still looking for potential easing in 2007.
Today also marks the opening day for retail investors looking to snap up T3. Careful not to get bowled over in the rush.
It is difficult to determine just how the issue will be accepted, given the underwriters are talking it up and the non-underwriters are indifferent. There will be a requirement of index-tracking funds to acquire an obligatory parcel, but from the retail perspective there is still a lot of T2 anger.
Apparently a roadshow held for financial planners at Sydney Town Hall last week was sparsely attended, with one commentator suggesting there were actually more Telstra (TLS) heavies in attendance than planners. This may have been a slight exaggeration, as early signs are that planners are tucking in. At 14% yield (grossed up to 19% on the instalment), the advice may well be that this junk bond is worth the ride until it’s time to cut and run. But that’s only achievable if the stock does not fall from its issue price over an 18 month period, and 28c would see any benefit wiped out.
For what it’s worth, the FNA database currently shows 3/4/3 (B/H/S), but then half the brokers are in on the deal and half out. As to how much this influences ratings is unclear, given GSJB Were is on the panel yet the analysts have an Underperform rating. The average target is $3.91 but this is dragged up by Credit Suisse (not on the panel) with $4.78. The brokers aren’t much help on this one.