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 MARKET REPORTS |
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Economic commentary
Slip sliding summer
January 14, 2007
Dr Ron Woods, Econoclast
The most significant change in the market landscape over the first couple of weeks of the New Year is the twin slide in stock markets, both here and abroad, and in bond yields.
Both likely indicate concern about the economic outlook, again both here and abroad. Sure we had a bit of domestic data, Retail turnover and Building Approvals, but these were for November 20007 which seems so long ago and before the two-late 2007 rate rises had fully taken effect.
And yes, Building Approvals improved (the trend number rose 2% in the month) but this was boosted by a very large jump in non-house dwellings (up 28.4% in the month but this typically is a volatile sub-series because when a new block of flats is approved the number of individual flats are counted).
The other sub-series “private sector house” approvals (which on average account for about 70% of all approvals in any month) also showed some improvement (up 0.2% seasonally adjusted or 1.5% using the trend measure) but this is far from a return to boom times in the overall housing industry.
The likely recovery reflects some pent-up demand from the basic need for shelter coming from population growth and a shortage of housing. This also is showing up in better Retail turnover which tends somewhat to mirror the trend in housing, as the chart shows. Also some of the apparent strength in Retail reflects the impact from higher food prices which directly boosts dollar valued turnover and visually, the recovery from near recessionary trading in 2005.
However this data is overshadowed by the slide in both stock prices, bond yields and the yield curve in particular. “Sub-prime” issues have kept 90-day bank bill futures well above the official cash rate but not much more so than at the start of the New Year.
However over this first two weeks of the year the curve from 3-year out to 10-year (the free-market curve where the direct influence of the RBA’s monopoly cash rate is limited) has shifted down by around 20 basis points. Three year bond yields are now again lower than the cash rate, a net change also of about 20 points.
While the spread from 3 to 10-year remains close to a record inversion 10-year bond yields are now around 65 points below the official cash rate which continues to be an ominous warning which it appears many share market investors are now taking note. Yet I fear what we have seen in the first two
weeks is likely to continue for a while yet, for at least until after the next CPI just before the January long weekend and the RBA’s February board meeting, but perhaps even longer. Relief is likely only when the too high official cash rate is lowered which will help bring down other related borrowing rates.
Regrettably unlike the Federal Reserve in the US our central bank is likely to wait a lot longer before doing the right thing and that is why I fear the outlook for investors in Australia: a summer of slipping and sliding.
Dr Ron Woods, regarded as one of Australia's leading market economists, has a knack for being far ahead of the curve in assessing the direction of the economy. With a PhD in Economics, Dr Ron Woods is a well-known commentator on economics and interest rates, and has worked for the Commonwealth Bank, Bankers Trust, NM Rothschild and Challenger. Dr Ron Woods produces the newsletter Econoclast, a fresh look at Australian economic events.
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Resident Trader: Book Review: Supercharge your Trading with CFDs
Stocks: Stock of the week – Mermaid Marine
Analysis: Should we fear a US recession?
Commodities: As the bear resurfaces in the US, gold thrives
Economics: Slip sliding summer
CFDs: Top 10 CFD Stocks
Markets: Wall St falls sharply
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