News

The latest ANZ-Roy Morgan weekly index of consumer confidence indicates that it was flat at 113.5 points, still 11% higher than the same period last year. ANZ chief economist Warren Hogan said, “Solid growth in house prices continues to be supportive for confidence but household fundamentals outside of housing remain weak amid low wages growth, a soft labour market, and high household debt.”

The latest ABS figures show that GDP grew 0.9% in the March quarter and 2.3% year-on-year (vs exp 0.7% /2.1%). CBA commented that the data “showed the driving force pointing to lower rates in Australia remains firmly in place. 1.0% points of the 0.9% growth in real GDP came from net exports and inventories. We think that is jobless growth – the miners behind the pick-up in export volumes are clearly cutting jobs and spending, while the drop in capex behind the fall in import volumes is job destroying. Inventories are transitory.”

Anticipating a rise in interest rates in the US as the Fed lifts the cash rate, US corporates are rushing to lock in long-term borrowings at low rates. Corporates have issued over US$85bn in bonds with 30y+ maturities, according to Bloomberg data.

Capital Economics said, “We suspect that today’s decision by the RBA to leave interest rates on hold at 2.0% is nothing more than a pause in the loosening cycle that could yet result in rates falling to 1.5% by the end of the year.”
ANZ said, “ Our reading of today’s statement is that the RBA is likely to remain on hold for some months now as it monitors the impact of the two rate cuts delivered earlier this year. We continue to believe that the bank retains an easing bias given deputy governor Philip Lowe’s recent comments that we “still have scope to lower rates if we need to” and the bank’s own forecasts which have below-trend growth extending into 2016 and the unemployment rate heading higher.”
CBA said, “We have had a 2% terminal cash rate target for a while now and that remains our base case. However, we recognise that the risk of a near term rate cut has probably increased recently as a result of the weak capex estimates. The lack of forward guidance … suggest to us that the RBA is a reluctant rate cutter from here… To us, that means that any potential further policy easing will be data dependent. Trends in the labour force will bear watching.”

The latest private business Capital Expenditure survey from the ABS provides information on actual spending in Q1 as well as an update of plans for the 2014/15 financial year and the second estimate of plans for 2015/16. Capex plans for 2015/16 are very weak, with a marked downgrade from the initial estimate, as reported three months ago. Mining plans are for a sharp cut in Capex spending and the service sectors are also looking to reduce investment. The extent of the weakness in Capex plans raises the question of whether growth forecasts for 2015/16 need to be lowered. New private capital expenditure fell by 4.4% (vs –2.2% exp) to $35.90bn in the March quarter. There was a small positive revision to the Q4 data. Total new Capex has now dropped 5.3% in the 12 months to the end of March. Spending on building and structures dropped 6.5% (s.a.) in the quarter to $23.1bn. Spending on equipment, plant and machinery fell 0.5% to $12.80bn. ACGBs rallied strongly on the release of the data.

ANZ’s inaugural green bond will be used for projects with a positive environmental or climate benefits and will finance a portfolio that contribute to low carbon industries and technologies. These projects include loans to wind, power and solar projects and also Green Star-rated commercial real estate. “Projects in the geothermal power and fuel efficient transportation sectors may also be considered in due course,” ANZ said. “We have developed the bond in response to investor demand and to deliver on our commitment to deploy capital for the transition to a lower-carbon economy.”

The AFR has reported that the way that the RBA makes rate decisions has come in for a review. The newspaper reports that the review expressed concerns that RBA’s forecasters focus too much on “gut feel” judgments and not enough on hard models. Concerns were also expressed that the bank may not be analysing the right things, given the seizmic changes to the Australian economy over recent years as well as the competence of the bank’s research and analysis teams to do the job properly. The AFR also reports that the review also called for reflection on why previous forecasts turned out wrong.

The Fed should weigh the effects of a rate rise on global economies and expect some serious volatility in financial markets, Fed vice chair Stanley Fischer said. “The US economy and the economies of the rest of the world have important feedback effects on each other … To make coherent policy choices, we have to take these feedback effects into account … The actual raising of policy rates could trigger further bouts of volatility, but my best estimate is that the normalization of our policy should prove manageable for the emerging market economies,” he said.

S&P has published a report that outlines the benefits to Australian regional banks from the likely introduction of risk weighted average floors for mortgages and suggests that regional banks will see a more competitive operating environment as capital requirements are smoothed between standardised and IRB capital banks. The report also indicates that the banks’ progress toward IRB accreditation will provide enhanced risk management capabilities regardless of the move to more standardised RWA floors. The big banks will have to raise $18bn of new capital and this could curb the rate of growth in home lending and reduce pressure on house prices, S&P says. If APRA required the big banks to use higher average “risk weightings” for home lending, this “would result in a higher level of capital held against mortgage loans across the entire industry, which would be positive for our overall credit view of the Australian banking system, particularly in light of growing concerns about property price inflation”.

Stanley Fischer, the Fed vice chair said the reserve is debating the timing of the first rate rise. “Which is better, early and gradual or late and steep? If we raise the rate from zero it will be harder to go back to zero if there is a problem,” Fischer said in a speech. “Our processes are not date determined, they are data determined … So much importance is given to first move and it’s misleading.”