Rate Cuts in June or July?

Yes. 1 and 2
Stability? Not if Labor gets in, rob Peter to pay Poor.... I mean Paul. and screw investors

 

Australia Bond 5 Year Yield - 1.45%

Australia Bond 10 Year Yield - 1.85%

Australia Bond 15 Year Yield - 2.09%

How about the assessment rate tied to say 10 or 15 year bond yield + 4% to 5% margin?

What's the point in having a static 7% assessment rate when chances are you are not going to get there in next 10-15 years. Why have the assessment rate so high in a world of low interest rates, inflation and wage growth?

Cheers,
Oracle.

 

I think the RBA and APRA have different end goals.

The RBA will want to try and arrest the collateral damage being caused by the price declines in SYD and MEL. The big drop off in car sales, land sales, retail sales. These are potentially going to lead to big job losses and that will be where they are most concerned.Whether they are concerned enough to move lower with the cash rate is an unknown. But its gone from a "maybe" to a "probably" in most economists views...

APRA is more concerned with the banking system and retail deposits . Their policies surrounding IO quotas and P&I assessment rates and the lending caps that have been a result of those policies are all about increasing the stability of the banking system and retail deposits. So they have competing interests with the RBA in some ways.... they wont want any extra "stimulus" . But when the rubber hits the road, neither can ignore the effects of the others agenda. You can be certain that APRA will not have any appetite for kickstarting any momentum . They wont want debt to income ratio's exploding again or IO volumes exploding again. But they face a conundrum and "may" have to give some ground...there's at least "some" potential risk that if they don't back things off a little they could end up with an increase in mortgage delinquencies anyway - and the system they are trying so hard to insulate against that shock may suffer a self inflicted shock anyway ... so I think they probably need to get together with the RBA and work out how they can both get what they want without the economy tipping into recession because of inflexibility allowing a mole hill to become a mountain.

For me, both of them should now be focused on arresting the decline - perhaps for different reasons - but its something they should have in common nevertheless. The most sensible solution ( I think anyway) would be for APRA to give a little on assessment rates.... Not much. 6.5% or 6% should do it. Let's all remember that APRA's end game was to engineer a mass migration to P&I in order to correct the P&I v IO imbalance and beyond that to get debt levels down to 6-7 x income. They have largely achieved the P&I rebalancing and could safely relax DTI ratios to an 8-9 x income level and still be well below the previous levels of 12-15 x income that they have worked so hard to deleverage the system from. They get 90% of what they want, but put a floor under the ongoing correction. Sounds like a good deal to me...

Something along those lines would enable just enough extra capacity to arrest the price declines and therefore the wider collateral damage now resulting from those declines, while allowing the RBA to keep its powder dry and protect the AUD . Whether or not that will happen... who knows? Its probably unlikely - which is why we will probably see RBA reductions instead.

 

Hmm I dont think its as clear cut as some may be suggesting. Any decisions will be based on the data that comes out that really reflects what is happening on the ground right now (which I suspect is far better than a few months ago).

I think this is how the RBA see it:

• Very fast drop of in activity in H22018 and early 2019 flowing through. Housing figures were horrible during this period.

I think they've completely mis-underestimated the power/impact of the first point on the broader economy and consumption. Its more 'animal spirits' of consumers - fear leading to people spending less. Very hard to predict or model this.

But...there's hope that it'll just self-correct with already very low rates. At least that's their current stance.

Making some completely random off the cuff observations about the state of play right now (smelling the direction of the winds) and making some calls, they MAY be able to ride it out if they hold the line and show a lot of courage to ride through it.

Things feel much better in Sydney since Feb.

• Credit is finally growing again after 6 consecutive monthly declines. We've got a leading sense for this, and I've pretty much said that this will happen from February/March. Its now being reflected in ABS data. Early pointer to sentiment.
• Data is now coming through proving that a recovery is taking place in the credit space. I strongly suspect that this will get better and better every month until May/June at least.
• Auction data has been decent/strong too and sustained. Its likely values are also starting to find their floor too.
• Consumption appears to be recovering too (big unknown?).
• P&I to IO migration is broadly complete (15-20% of all mortgages switched inside 18 months), at least in an economic sense, on its impact on consumption (although it is an ongoing impact).
• Election over, with massive stimulus announced from both the feds & state (NSW parra metro starting next year/2020) + an 8bn tax cut coming to hip pockets in Jul-Sep quarter.

Employers may have already started adjusting their plans though...a 6 month slowdown is enough time to impact decisions. Not sure how it's going in Melbourne, I can't really comment how I think it feels there (haven't spent enough time to make random observations).

There was an outstanding 6 month period in eco activity H12018, followed by a very bad 6 month period in H22018. H12019 appears to be recovering though. H22019 may be very good too without the need for more monetary stimulus.

 

So earlier than expected..... Commonwealth Bank cuts rates......rest to follow I guess??