Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 31 March 2015

Stand by for an April rate cut

Rates heading lower

Iron ore futures have gotten absolutely smoked - down by 3.6 percent today to new lows - with more falls forecast. Thermal coal prices are getting smashed. Oil prices have been crushed.

Australia's commodities index has been copping an absolute shellacking, and although the Aussie dollar has declined to 76 cents, this still has not even nearly offset the decline in spot prices.

Unfortunately the latest data from the US has suggested that the first rate hikes Stateside won't be coming to our assistance quickly enough either.

Domestically, meanwhile, the latest round of data relating to capex was...well, crapex.

The Reserve Bank has consistently implied a preference towards patience but against this backdrop another rate cut seems all but certain.

Futures markets now see a cut on April 7 to a cash rate of 2 per cent as about a three-in-four likelihood.

The uppermost arguments for keeping rates on hold in April are twofold:

(i) allow the Reserve Bank to wait for another round of inflation data; and/or

(ii) wait a bit longer to see what housing markets are planning on doing.

The inflation side of the argument lacks a little conviction, given that the last print was within the target range, inflation expectations remain soft, and wages growth is mired at a survey low.

Housing markets will likely sort themselves out in time, with building approvals and home starts tracking at all-time record highs, and at least five (probably six) capital cities heading for an oversupply of apartments in time.

Today's Financial Aggregates figures showed investor housing credit growing at a somewhat slower pace in February, which may douse concerns here too, though exactly why APRA deems an arbitrary growth rate of 10 per cent to be an appropriate agitation threshold is less clear.

Implied yields on February 2016 cash rate futures contracts are plumbing new depths at just 1.6 per cent.

Summarily markets seem to taking the view that if rates must fall further then they might as well do so now - and thus markets are now betting on a cut in April 7.