The Reserve Bank of Australia has left interest rates at a record low 2 per cent but is sounding a little more upbeat about the prospects for the domestic economy.
Most economists were expecting the bank to hold rates. The RBA has already cut rates twice this year, in February and May, to stimulate the economy and in its preceding decision on monetary policy on November 3 the central bank flagged that further rate cuts are possible in the coming months.
From the statement (emboldenment ours):
At today’s meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.
The RBA has an inflation target of between 2 and 3 per cent.
RBA governor Glenn Stevens struck a casual note last week when quizzed by reporters on a prospective rate cut, telling them, according to Bloomberg, that: “We’ve got Christmas. We should just chill out, come back and see what the data says.”
The week ahead is among the most important of the year. Rarely is there such a confluence of events in a short period that will have far-reaching implications for investors that are known ahead of time and have been discussed so extensively. One implications of this is that there are expectations that have been discounted by the market.
The potential for sharp price gyrations and the dictates of money management should not distract from the big picture and the durable trends. In this context, there are two important considerations long-term investors ought to keep in mind.
First, the divergence in the trajectories of monetary policy has not peaked, or even come close to a peak. If we agree this is the main driver in the foreign exchange market, then further dollar appreciationon a trend basisshould be anticipated. There has been a dramatic re-build of long dollar positions since mid-October. The late momentum traders are vulnerable in the period ahead. It may occur after this week’s events, or it may be after the FOMC meeting later in December. Such a shakeout may provide long-term investors with a new opportunity to position with the underlying trend.
Second, while all Fed tightenings do not lead to a dollar rally, the Reagan dollar rally and the Clinton dollar rally (the previous two significant dollar rallies since the end of Bretton Woods) were preceded by Fed rate hikes. Recall Volcker’s hikes prior to the 1980 election helped set the stage for that dollar rally that ultimately lift the greenback more than 50% on a real trade-weighted basis before coordinated G7 intervention reversed it.
The Fed raised rates in 1994. This, combined with a new Treasury Secretary that promised not to use the dollar as a trade weapon, spurred the five-year Clinton dollar rally. It too ultimately ended with the help of coordinated intervention in October 2000.
Here is a thumbnail sketch of next week’s seven key events:
The busy festival season failed to bring cheer to India’s largest companies in November, as business sentiment fell to the lowest level since February 2014, with companies also seeing little chance of a revival over the coming months, according to research firm MNI Indicators.
The MNI India Business Sentiment Indicator, a gauge of sentiment among BSE-listed companies, fell to 60.9 in November from 62.3 in October, to stand 11.6% down on the year. The fall in sentiment was observed across both manufacturing and construction companies, while sentiment among service sector companies rose for the first time in five months, it said.
According to MNI Indicators, new orders fell slightly between October and November, leaving orders down 11.1% on the year. Export orders fared better, putting in a rise of 5.3% on the month, although were still 9.4% below the same level in November 2014. The production indicator fell for the second consecutive month and was down 14.1% on the year.
Companies were less optimistic about the next three months with the Expectations Indicator falling to 72.2 in November from 75.1 in October.
Moody’s Investors Service today cautioned that a loss of momentum on reforms may hamper investment and prove to be a ‘downside factor’ for Indian companies, even as it said most corporates will benefit from strong economic fundamentals and accommodative monetary policy.
It further said that weak global cues and an impending US rate hike may also have an impact on Indian businesses.
Moody’s said that a failure by the government in implementing key reforms such as Goods and Services Tax (GST) and land acquisition laws could hamper investment and signal a derailed reform prospect.
“A healthy 7.5 per cent GDP growth for India for the fiscal year ending March 2017 and a pick-up in manufacturing activity will be broadly supportive of business growth,” Moody’s VP and Senior Credit Officer Vikas Halan said.
But despite these overall supportive domestic conditions for the country’s corporates, potential headwinds loom from a loss of reform momentum, he said.
The Modi administration so far this year has been unable to enact legislation on key reforms, including a unified goods and services tax and the Land Acquisition Bill.
“It seems highly unlikely that the major reforms will get enacted by the Upper House of Indian Parliament where the ruling coalition is in minority. A failure to implement these reforms could hamper investment amid weak global growth,” Halan added.
Reuters with the headlines from a letter Yellen has written in response to points raised
Most fed policymakers expect pace of rate hikes will be gradual
Says overly aggressive increase in rates would at most benefit savers only temporarily
Says overly aggressive rate hike could bring about lasting return to low rates
More … direct quote of the pertinent points:
It remains critically important for all Americans, including savers, that monetary policy continues to foster economic expansion and stable prices. We all hope and expect that the economy will continue to expand, that the jobs market will continue to make progress, and that inflation will move toward our 2 percent price stability objective. If that is the case, my colleagues and I have indicated it will be appropriate to begin to normalize interest rates. Most of us expect the pace of that normalization to be gradual. An overly aggressive increase in rates would at most benefit savers only temporarily. Rather, it would undercut the economic expansion, necessitating a lasting return to low interest rates. Other countries have paid a heavy price for being forced to reverse course. Japan, where interest rates have remained near zero for most of the past 25 years, serves as a cautionary tale.
She says ‘most’ policymakers want a gradual rise …. I’d be interested to know who are the ones looking for a rapid rise in rates?
Comments from San Francisco Federal Reserve President John Williams on the weekend:
“Assuming that we continue to get good data on the economy, continue to get signs that we are moving closer to achieving our goals and gaining confidence getting back to 2-percent inflation… If that continues to happen there’s a strong case to be made in December to raise rates.”
Lets break that down …
“Assuming that we continue to get good data on the economy
continue to get signs that we are moving closer to achieving our goals
and gaining confidence getting back to 2-percent inflation
… If that continues to happen there’s a strong case to be made in December to raise rates.”
Well, yeah. Nothing new or insightful from Williams here (which means an A+ for him on the how to be a central banker test).
“The data I think have been overall encouraging, especially on the labor market”
The Government will take a hit of Rs1.02 lakh crore in 2016-17 post hefty increase in salary and allowances of Central Government employees and pensioners following the implementation of the 7th Pay Commission recommendations.
The Pay Commission, headed by Justice A K Mathur, on Thursday recommended an increase in pay by 16 per cent, 63 per cent in allowances and a 24 per cent hike in pension, suggesting a total increase of 23.55 per cent.
“The total financial impact in the FY 2016-17 is likely to be Rs1,02,100 crore, an increase of nearly 23.55 per cent over the business as usual scenario,” the 7th Pay Commission report said.
Of the Rs1.02 lakh crore outgo, Rs74,000 crore will have to be funded from the Union Budget and another Rs28,000 crore from the Railways Budget, Finance Minister Arun Jaitley said. The recommendations of the pay commission will come into effect from January 1, 2016.
The financial impact of the recommendations of this Commission will be reflected through increases in expenditure on pay, allowances and pension.
While the pay will increase 16 per cent to Rs2.83 lakh crore, this will have a financial impact of Rs39,100 crore in the current fiscal.
South Africa’s central bank raised interest rates on Thursday despite the country’s grim economic outlook as it seeks to counter inflationary pressures with a potential rate rise in the United States looming expected to add to pressure on the weak rand.
The monetary policy committee raised the repurchase rate by 25 basis points to 6.25 per cent, its second rate hike in four months
The decision to increase the repo rate even as Africa’s most advanced economy stutters with anaemic growth is in line with the South African Reserve Bank’s mandate of focusing on inflation targeting.
The move reinforces the credibility of the institution, with the ruling African National Congress facing the prospect of tough battles to maintain its majority in key cities, including Johannesburg and Pretoria, at local elections next year. But it also highlights the challenges monetary authorities are grappling with as the economy is expected to grow at 1.5 per cent or less this year – far below what the country needs to tackle rampant unemployment and poverty.
The central bank revised down its growth forecast for the year from 1.5 per cent to 1.4 per cent.
South Africa has been enduring the headwinds of the slowdown in China’s growth and low global demand. But economic activity is also stymied by domestic constraints including infrastructure bottlenecks, particularly a severe electricity supply crisis, policy uncertainty and weak investor and consumer confidence.
RBI employees will go on a day’s mass casual leave on Thursday to protest the Government’s move to relieve the central bank of some of its vital operations “in the name of the draft financial code and legislative reforms”.
The strike, the first at the Reserve Bank of India (RBI) in six years, is expected to affect payment and settlements at banks and in markets.
The prospect of the strike affected Government bond sales on Wednesday, with volumes falling to 92.65 billion rupees ($1.40 billion), less than 50 percent of the daily average.
The employees are also opposing the proposed creation of a monetary policy committee that would include members of the Government, seeing it as a curb on the RBI’s decision making powers.
Samir Ghosh, convenor of the United Forum of RBI Officers and Employees, told reporters that the mass leave call has been given to press for saving the RBI and settling pension issues.
“With the proposed mechanism of Monetary Policy Committee (MPC), the Government plans to intervene and themselves decide the monetary policy which has been the exclusive jurisdiction of RBI so far,” he said.
Most participants saw the downside risks arising from economic and financial developments abroad as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be nearly balanced.
Participants expected net exports to continue to subtract from GDP growth in the second half of the year, reflecting weak foreign activity as well as the earlier appreciation of the dollar. However, solid underlying momentum in private domestic demand was anticipated to support economic growth going forward.
More confident on inflation
Participants still expected that the downward pressure on inflation from the previous declines in energy prices and the effects of past dollar appreciation would prove temporary.
Several participants, however, cited downside risks to inflation, pointing, for example, to declines in market-based measures of inflation compensation. Nonetheless, participants generally continued to anticipate that, with appropriate monetary policy, inflation would move toward the Committee’s objective over the medium term, reflecting the anticipated tightening of product and labor markets, the waning of downward pressures from energy and import prices, and stable inflation expectations.
On the timing of a first rate rise
Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting.
Nonetheless, they emphasised that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period.
Some others, however, judged it unlikely that the information available by the December meeting would warrant raising the target range for the federal funds rate at that meeting.