It seems odd, given that every economist of note accepts that globalisation and technology have changed the way labour markets work so much in recent years, that no-one has really changed their models of how unemployment, wages and inflation interact. Simply re-stating historic relationships with religious fervour doesn’t strike me as sensible. But, that having been said, chart 1 seems a fair place to start when suggesting that the odds favour a further pickup in US wage growth in the months ahead. I don’t think you can take old relationships for granted but wages react to unemployment with a lag, and we’re on a path towards faster wage growth. The bad news? The correlation between hourly wages and the core PCE deflator is terrible (glance in the margin). The bottom line, is that I’m a lot more confident that lower unemployment will deliver faster wage growth in the months ahead, than I am about any unemployment/inflation relationship. I want to position for faster wage growth, by shorting the front end of the US curve in anticipation of a less dovish tone to Fed-speak in the autumn.
2-year US swap rates have risen by 30bp since the end of November, the low point of the fall back from last summer’s taper-spike. Over the 7 months since then, the biggest major FX movers have reacted to interest rate moves so that at the top of the FX rankings are the New Zealand dollar (up 7.9% against the dollar, with rates up 55bp, and the pound, with rates up 56bp. At the other end of the spectrum, the Swedes have seen rates fall by 69bp, and the currency has dropped 4.45% against the dollar. Who are the standouts? The SEK, NZD, and AUD are all doing better than the rats moves might imply, the pound, US and Canadian dollars are doing less well. I can’t help thinking that SEK remains vulnerable and AUD in particular, is a sell sometime between now and the end of summer. On this basis, we are more energised to short AUD/USD ahead of September, than we are excited about EUR/USD.
Look who’s taking on the Reserve Bank again over the dollar. Or rather who’s not because by the looks of it the whole world is.
While an exchange rate is shorthand for a nation’s economic fortunes, oddly enough economists find it impossible to predict. Well, they have no problem predicting it, but getting it right has proved quite the challenge. Maybe it’s because there are two sides to every exchange rate.
Anyway few are saying the dollar should rise, yet that’s what it’s been doing for months.
For a long while it was tracking the euro almost uncannily, even though the two currencies have absolutely nothing in common except for the fact that they’re not the US dollar.
Then it went through a phase of following Wall Street up and down.
Maybe it’s doing both since the euro has been rising against the US dollar while Wall Street has been going gangbusters.
Indeed there’s a connection between the two because very low rates mean money manipulators are happy to take a bigger punt on riskier opportunities, including us, especially when financial markets have never been calmer.
Still, that’s not stopping the Reserve fretting about commodity prices falling. If the dollar knew what it was doing it would be following them down quick smart.
Never mind export volumes are booming, economic growth has unexpectedly climbed up a notch and our interest rates are a beacon in a yield-deprived world.
Even CommSec’s index comparing international prices of iPads, based on the economic theory they should be the same after adjusting for exchange rates, puts the fair value of the dollar at US94¢.
That bloody $ ...of course there's a connection potty Potts .
The $ dropped its daks, the IR is kept low for now till later it should go ups it's way.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
If you're selling shit sandwiches, and the guy next to you is selling shit and pickle sandwiches. He's going to sell more sandwiches than you. But as soon as you start selling shit sandwiches with pickle and ham, then your sales will start to pick up.
Sometimes it's not just supply and demand. Sometimes it's the percentage of shit in the sandwich.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
The Australian dollar is set to dive to its lowest level in half a decade. This year’s BusinessDay economic survey has it hitting US86¢ by June 30, a fall of 8 per cent from its recent range of US93¢ to US94¢.
In another welcome result none of the BusinessDay panel expects particularly weak economic growth. On balance they expect the unemployment to stay at 6 per cent rather than climb to the 6.25 per cent forecast in the budget.
But they expect somewhat slower economic growth than the budget and weaker consumer spending as the economy continues to navigate away from mining investment to new drivers of economic growth.
The BusinessDay forecasting panel is made up of 25 of Australia’s leading forecasters in the diverse fields of market economics, academia, consultancy and industry associations. It includes several former Treasury forecasters. Over time its average forecasts have proved to be more reliable than those of any of individual member.
The panel expects Australia’s terms of trade to slip 4.9 per cent during 2014-15. It appears to be a better outlook than the budget’s which expected a slide of 6.75 per cent, but much of that slide was delivered almost immediately as iron ore prices plummeted 9 per cent between budget night and June 30. The panel’s average forecast masks wide differences in individual expectations. Steve Keen expects a slide of 10 per cent in 2014-15. Gareth Aird, of the Commonwealth Bank, expects a slight increase, the only panel member to do so.
China’s economy is expected to grow at its present pace, advancing 7.3 per cent, as is the United States and the global economy at 2.2 per cent and 3.3 per cent.
Growth in household spending will be anemic, climbing just 2.6 over the year, much less than inflation and population growth combined. The weakest forecast, from Bill Mitchell of Newcastle University, is for spending growth of just 1.8 per cent. Independent economist Stephen Koukoulas is the most optimistic predicting 3.25 per cent, nowhere near the likely combined rate of inflation and population growth suggesting that inflation-adjusted spending per capita will continue to fall.
After falling for a year real wages will mark time, barely climbing. The panel expects inflation of 2.6 per cent and wage growth of 2.9 per cent, well below the rates of 3 per cent that were common this decade and 4 per cent in the last half of the last. Paul Bloxham and Jakob Madsen are the most optimistic, predicting wage growth of 3.5 per cent and Steven Keen and Bill Mitchell the most pessimistic, expecting 2 per cent.
Tom Skladzien, of the Australian Manufacturing Workers Union, ought to have a good handle on wages. He plumps for 2.5 per cent, beneath his forecast for inflation, which is 2.7 per cent. By contrast Julie Toth, who works for employers at the Australian Industry Group, expects wage growth of 3 per cent, well above her inflation forecast of 2.5 per cent.
The lowest forecast for headline inflation is 1.8 per cent from Tim Toohey of Goldman Sachs. But his forecast for underlying inflation is a more standard 2.5 per cent, suggesting he believes the one-off removal of the carbon price to affect the headline but not the underlying number. Shane Garrett of the Housing Industry Association has the highest headline inflation forecast, 3.1 per cent. But he expects a tamer underlying result of 2.8 per cent. The panel member forecasting the worst underlying inflation is Gareth Arid, who predicts 3.1 per cent.
The average unemployment forecast of 6 per cent hides diverging views. Saul Eslake, of Bank of America Merrill Lynch, expects the unemployment rate to climb to 6.6 per cent by June 2015. Stephen Koukoulas expects it to fall to 5.5 per cent.
Housing investment is set to climb a healthy 7.4 per cent in the view of the panel, but the range of forecasts is extraordinarily wide from a low of 1.4 per cent from the HIA's Shane Garrett (who ought to know about housing) to a high of 15 per cent from Peter Jones, of Master Builders Australia, (who also ought to know about housing).
The entire panel expects business investment to continue to slide, as did the budget. The budget went for a slide of 5.5 per cent. The panel goes for 5.8 per cent but with wide variation. The most optimistic, Neville Norman of Melbourne University, expects a further fall of just 1.3 per cent. The most pessimistic, the National Australia Bank's Alan Oster, expects 10.2 per cent.
It adds up to historically weak, but not disastrous GDP growth of 2.8 per cent. Steve Keen who this time last year expected growth to go backwards (a recession) is this year happy to forecast 2 per cent suggesting that the worst that is likely won’t be that bad.
If you're selling shit sandwiches, and the guy next to you is selling shit and pickle sandwiches. He's going to sell more sandwiches than you. But as soon as you start selling shit sandwiches with pickle and ham, then your sales will start to pick up.
Sometimes it's not just supply and demand. Sometimes it's the percentage of shit in the sandwich.
Especially since the supply of shit is unconstrained.
Reserve Bank of Australia Governor Glenn Stevens fronted the House of Representatives this morning to provide testimony on the state of the Australian economy. The RBA remains optimistic about the outlook but it’s playing a dangerous game that could blow up in its face if the Australian dollar doesn’t depreciate.
The outlook for the Australian economy remains unchanged since August’s Statement on Monetary Policy (The big question mark hanging over the RBA’s outlook, August 8), so I won’t bore you with that discussion again; instead, Stevens had some curious comments to make on confidence, monetary policy and the rebalancing of the Australian economy.
Low interest rates continue to support the Australian economy, particularly housing construction, but the biggest effect of accommodative policy thus far has been to bid up asset prices, particularly in the housing sector.
Stevens notes that this is ‘a big part of how accommodative monetary policy works’. It encourages substitution towards higher-risk assets, improves the balance sheets of households and businesses, and encourages higher lending.
What accommodative monetary policy has failed to do -- at least to the degree necessary -- is lower the exchange rate. So far the dollar -- which admittedly is down 10 per cent since April last year -- has not done much to help achieve more balanced growth.
Stevens appears to be putting a lot of faith in ‘animal spirits’, noting that confidence is something that monetary policy can’t directly cause and greater confidence is needed to encourage greater investment.
Many firms remain happy to deleverage and refinance existing debt; they’d rather pay dividends and return capital to shareholders than implement risky growth plans. As a result, non-mining investment (outside residential construction) remains subdued.
What’s curious about Stevens’ comments is that monetary policy does affect confidence -- of both the household and business variety. The thing about confidence is that it is a function of other factors -- consumer measures are largely driven by the state of the labour market.
By shifting incentives to lenders and borrowers, monetary policy must necessarily have an influence on confidence. If confidence is subdued, isn’t that an indication that there remain a range of underlying problems within the economy? Isn’t that an indication that perhaps monetary policy has not done enough to overcome inadequate demand or encourage investment?
In Australia’s case, the non-mining sector is cautious because the dollar remains uncomfortably high. For years it’s suffered at the hands of the mining investment boom, which saw interest rates and the exchange rate rise to a level that left them largely uncompetitive.
Furthermore, lending markets have failed Australian businesses. Since the end of 2008, mortgage lending has accounted for the entire rise in outstanding credit. The non-mining sector -- which predominantly relies on domestic banks or equity for financing -- has been starved, resulting in job cuts and a further loss of competitiveness.
Our banking sector has gone all in on mortgage lending, which carries a lower risk weight on its balance sheet and allows for higher leverage and greater profits. Amazingly none of the banks have realised that by undermining the very business sector that pays the wages of a vast majority of Australian workers, they have inevitably increased the riskiness of their mortgage holdings.
Now obviously none of this is set in stone; the outlook remains highly uncertain. The dollar could finally fall on the back of softer commodity prices and a lower terms-of-trade, easing some of the competitive pressures on the non-mining sector. The resulting boost to confidence would then feed through to investment.
But isn’t it fair to say that Stevens is being a little complacent about the dollar?
The upcoming task for the RBA is very simple: they need to lower the dollar and encourage greater business investment. The easiest way to achieve this would be to introduce macroprudential policies, which would make business lending more appealing, and then lower rates further to kill off support for the Australian dollar.
As it stands, the RBA is playing a very dangerous game. It openly admits that it has no idea how big the mining investment collapse will be -- neither does anyone else -- but the potential ramifications of getting policy wrong are profound.
If mining investment collapses before the dollar has fallen sufficiently, the non-mining sector will be in no position to fill the gap and rebalance the Australian economy. That scenario would inevitably result in Australia’s first recession in 23 years.
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