With the RBA interest rate decision (more like no-decision) this afternoon, the can gets kicked further down the road.
At this juncture, there are two competing visions of where rates will go.
One is optimistic and the other is pessimistic.
Let’s start with optimism.
The RBA’s own vision according to some analysts, would only see a rate hike potentially somewhere around 2020. And this would only happen if a number of major economic indicators continue to show signs of momentum.
This rate hike hinges on 3.5% GDP growth, low and stable inflation and wage growth.
Now for the pessimism.
These three charts could point to a RBA interest rate cut before 2020
The case can be made by looking at three different charts:
This chart may be familiar to some readers of Markets & Money, as it is Bloomberg’s ‘neural network’ algorithm that tracks the probability of recession.
Then there’s this chart:
This chart tracks a variety of US Treasuries yield curves. As you can see, the last time these yield curves inverted was in the lead up to the 2008 GFC.
The spread between two- and 10-year rates (the most closely watched spread) is beginning to dwindle quickly, down to 15 basis points.
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Finally, there is the kicker, Australian real estate:
Source: Business Insider
Real estate is where pessimists can really make their case. As by the RBA’s own admission, they don’t know how to read the downturn. RBA deputy governor Guy Debelle said the following:
‘It’s not entirely clear how much of a boost the rising house prices provided to the economy on the way up, which also means it’s not entirely clear how much of a drag it may provide or may constitute on the way down.’
‘I’m not saying that because I think it’s one way or the other, it’s just that it’s really an uncertainty.’
Markets & Money’s Selva Freigedo outlines that behind this uncertainty is a massive household debt bomb that could explode amid tightening credit regulations.
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Risk picture looks worrying when all factors are combined
This is just part of the risk picture.
If a US recession hits, it could trigger a global recession in conjunction with Italy’s debt problem, the leveraged loan market blowing up and plunging iron ore prices due to rapidly slowing Chinese growth.
What would the RBA do in this circumstance? Well, they haven’t left themselves much room to maneuver over their past 25 meetings.
It could cut interest rates to zero, juicing the economy as much as possible.
Let’s at least hope it doesn’t come to negative interest rates, like we have seen previously in Europe and Japan.
Perhaps in trying to please everyone and address too many ephemeral variables, the RBA will end up pleasing no one.
Time will tell.
For Markets & Money