Reserve Bank board facing fine balances

All eyes this week will be on tomorrow’s meeting of the Reserve Bank board.

Most economists believe a rate cut is unlikely even though retail sales fell very sharply in June and the housing industry is clearly in retreat.

At 4.5 per cent, Australia’s inflation rate is still well above the Reserve Bank’s target of 2-3 per cent inflation over the course of a business cycle.

But another rate rise is also virtually off the table.

The Reserve Bank Governor, Glenn Stevens, has said that he accepts that the Australian economy is slowing.

So much so, in fact, that the Prime Minister, Keven Rudd, had to talk down rumours of a recession, late on Friday.

Rudd also urged Australia’s banks not to raise rates again, above levels indicated by the Reserve Bank’s overnight cash rate.

The Reserve Bank is still worried, though, about the risk of high returns from commodity exports, driving up Australia’s inflation later this year, as that money starts washing through the national economy .

The commodity price index, which the Reserve Bank has just released, confirms that fear.

It shows iron ore and coking coal prices, in particular, spiking sharply over the past year.

Figures to be released this week will throw at least some extra light on the state of the Australian economy.

House price indexes, for Australia’s eight capital cities, are to be released today.

They are expected to reflect some easing, as high interest rates have put buying a home beyond the reach of thousands of Australian families.

Housing finance figures, due out Wednesday, will probably reflect further falls in the number of new loans being issued.

But most attention will be on the July unemployment figures, which will be released on Thursday.

The Australian job market has been tight and that is not likely to change.

But the figures will be examined closely for any sign of weakening in Australia’s job market.

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2. Could the Reserve Bank do the unthinkable tomorrow?

US and European markets weaker

Australia’s share market will open today without a strong lead from overseas.

Both US and European markets were largely flat over the weekend.

The Dow Jones industrial index closed 51.70 points down at 11,326.32 on Friday, US time after posting some strong gains earlier in the week.

And Europe’s DJ Stoxx 50 index closed 28.79 points down at 2,852.56.

That happened after two European giants, BMW and Ryanair predicted tougher times ahead.

Oil prices, though, rose on Friday US time.

Oil futures were $US1.02 a barrel higher at $US125.10.

Interest rates will be the big local story this week.

But the Reserve Bank board, which meets tomorrow to review rates, is thought likely to leave them on hold.

Meanwhile, the $A’s previous rise towards parity with the $US has stalled.

On recent trades, the $A has been  fetching just 93.1697 US cents.

And Australia’s trade minister, Simon Crean, is saying that the recent collapse of world trade talks in Doha is not a total failure.

He says a higher platform, for future trade, did emerge from those talks.

Related stories:

1. Australian share markets face a grim start
2. Share prospects still clouded

Wall Street hesitates despite stronger US growth

Stronger US growth failed to sustain traders’ confidence on Wall Street overnight and the market ended down after
rising solidly over the two previous says.

The US Commerce Department reported overnight that America’s economic growth rose to an annual rate of 1.9 per cent in the second quarter of 2008.

However that fell short of the  2.3 per cent growth that market economists had predicted.

Tax rebates boosted consumer spending in the quarter.

So did expensive steps the US government took, to avert a financial melt-down.

The Dow Jones industrial index closed 205.67 points down at 11,378.02.

The S&P 500 lost 16.88 points to close at 1,267.38.

And the tech heavy NASDAQ composite index dropped 4.17 points to close at 2,325.55.

But oil prices resumed their downward path.

Oil futures fell $US2.61 a barrel to close at $US124.16

Oil prices fell almost $US16 a barrel in July.

However the US economy is still being held back by continuing weakness in America’s housing market.

The news wasn’t all good.

US inflation has now crept up to 4.2 per cent.

The $A was trading at 94.15 points, a short time ago.

Related stories:

1. Wall Street traders still nervous
2. Wall Street rises, but so does oil

Local economy slows, but rates may stay high

With retail sales plunging, credit tight, building approvals down and both consumer and business confidence at near recession levels, even market players are starting to price in an early rate cut.

That is clear from the reaction of the bank bills market to yesterday’s fall of 1 per cent in Australia’s retail trade during June.

Players there are now aggressively pricing pricing in a cut in interest rates, sooner rather than later.

So it is now more more tempting than ever to think that the Reserve Bank will soon do the right thing.

That is, of course, cut Australia’s interest interest rates.

This dream, held by an increasing number of Australians, is gradually taking firmer hold among the public, too.

But there are still restraints.

The main one is that Australia’s inflation rate, at 4.5 per cent, is still well above the Reserve Bank’s target range of 2-3 per cent, over the course of a business cycle.

But we can dream.

The bank’s board will meet next Tuesday, to review rates.

That will be its normal monthly meeting.

But most economists still believe there won’t be a rate cut, any time, this year.

Alan Langford, of HBOSA, is one of them.

The Reserve Bank has accepted that the Australian economy is slowing.

But Langford says it is still far from ready to cut rates.

“The brief statement the RBA will issue next Tuesday, following the Board meeting, will not give too much away,” Langford says.

“But the detailed quarterly statement on monetary policy on Monday August 11 will incorporate the revised GDP and inflation forecasts.”

Langford said these would set out a road map, for future rate cuts.

Related stories:

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2. Economy “moderating” so rates left on hold

Did the credit crunch NAB another scalp?

It’s not a great career move.

Quitting, that is, just a few days after your employer had to set aside $830 million, to cover losses  incurred on your watch.

That’s not a great look.

The National Australia Bank is well aware of what is being said, about the announcement that its present chief executive, John Stewart, will be leaving soon.

Charitable people might well applaud, arguing that Stewart has acted – honorably – accepting responsibility for that loss.

A decision firmly in the great tradition of Scott of the Antarctic.

The less charitable view is that John Stewart has been made to take that responsibility.

Naturally enough, the bank is trying to discourage both views, saying the Stewart’s departure has been in planning for 18 months.

Its chairman, Michael Chaney, was blunt about that, saying there is absolutely no connection between Stewart’s decision to quit and that $830 million.

“Any suggestion that there is a connection is way off the mark,” Chaney told reporters.

But that won’t convince everyone.

Stewart, who is now 59, will take a generous retirement package with him.

The talk is that it will add up to more than $3 million.

Mr Stewart, a Scot, originally signed on for a three year period as NAB’s CEO, back in 2004, but was persuaded to stay on, at the end of that time.

His declaration, when he accepted the job, might find a place, one day, in a collection of famous first words.

“We have some short term issues to manage,” Stewart said back then, in an oblique reference to a nasty currency trading scandal.

But he took a bold view, at that time.
“…I am confident that the board and the management team will tackle these head on and the National will continue to improve.”

That was three years before the credit crunch, perhaps even before collateralised debt obligations became fashionable.

Related stories:

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2. The worst of the credit crunch may have passed, but…..