Tuesday, 2 September 2008

RBA Waffles, Markets Disappointed

Well, if you thought an RBA rate cut might spark a rally in equities you would have been wrong. While there was no surprise the RBA didn't go 50 bps, the decision at today's meeting to cut 25 bps was accompanied by less than inspiring commentary about the likelihood of further cuts. Thus the stockmarket abruptly gave up the gains made earlier in the day.

I rarely comment on the reasons the stockmarket goes up or down on any given day but the reason for today's afternoon reversal was clear. Basically the RBA waffled on about the "opposing forces at work" as it has done for the last several months. Sure, inflation has not gone away as yesterday's TD securities, Institute of Melbourne inflation gauge reminded us, showing inflation at a 4.2% annual rate, however as mentioned before inflation is a lagging indicator and it will prove not be the problem the RBA thinks it is in the coming months as we transition towards a more deflationary environment.

At the end of the day the language used in the RBA's statement, whilst not closing the door on further rate cuts, left some doubt as to if and when more cuts would be forthcoming. The RBA made clear that any further decisions will be data dependent. As one economist put it;

"It's not as dovish as we thought. The guidance...is quite clear that they're looking month to month and meeting to meeting, and it just depends on how things evolve with the economic data, the currency and the global financial conditions,'' Stephen Walters, chief economist with JP Morgan, told Reuters.

And so we will continue to monitor the data as it comes in. Currently the cash rate futures market is pricing in an 83% chance of a 25 bps cut in October. I think we can expect to see more weak data in coming months that will lead the RBA to cut at least once more before the year is out.

Click on this link for the full RBA statement.