Rates back to 6 per cent

[clontaago]

INTEREST rates may drop back to 6 per cent by late next year, as the latest economic data shows a significant slowing in the economy.

NAB chief economist Alan Oster said there was a 30 per cent chance the Reserve Bank would begin cutting rates this year as economic growth deteriorated.

As the bank looks to have won another round in its fight against inflation, Mr Oster is forecasting interest rates will fall steeply in 2009 from its 13-year high of 7.25 per cent back to 6 per cent.

"An interest rate cut this year is a possibility, but there may not be enough of a slowdown," he said.

"But we think that by the late 2009 they will be down to about 6 per cent."

This comes as the latest NAB business survey shows spending patterns are slowing and business conditions have fallen to their lowest point since late 2002.

Mr Oster said the economic downturn was now "broad based" and the "deceleration is gaining momentum" after the bank's back-to-back rate rises in February and March.

The business survey showed a double-digit fall in business conditions for retailing, transport, finance and property.

Mr Oster expects unemployment levels will jump from just over 4 per cent to about 5 per cent next year.

This follows Monday's job advertisement survey that registered its fourth consecutive month of declines, as employers pared back hiring.

Citigroup co-head of market and economic analysis Paul Brennan said the upcoming consumer price index on April 23 would show inflation was still very high, but that the bank would look through the data.

"There is still a lot of inflationary pressure in the economy from the strong growth in the second half of 2007, but inflation pressures should begin to moderate in the next few months," Mr Brennan said.

"The RBA is adopting a wait-and-see approach because there has been a lot of tightening and this takes time to work its way through the system."

Mr Brennan forecast that rates would not start to fall until early next year and would drop to about 6.5 per cent by the end of 2009.

Traders on the Sydney Futures Exchange have priced in a greater than 50 per cent possibility of interest rates falling to 7 per cent in November.

Deutsche Bank economist Phil O'Donoghue said it was "a bit early to be talking about rate cuts" as the finance house was still forecasting another rate rise to 7.5 per cent later this year.

He points to the surge in coal prices as being a major threat to inflation, as it could push the terms of trade even higher than February's record $3.3 billion trade deficit.

Earnings of the big mining firms are expected to be boosted by a tripling in the price of coal.

 

[Canteen Worker]

If they do drop it will alll be because of the prudent management of the Howard Government over the last 11 years. If they go up, or inflation or trade deficits become a problem it is all because Rudd and Co have been in power for 4 months.

 

[Guest]

If they do drop it will alll be because of the prudent management of the Howard Government over the last 11 years. If they go up, or inflation or trade deficits become a problem it is all because Rudd and Co have been in power for 4 months.

The truest comments you have ever made CW. 

 

[ManlyBacker]

MB's crystal ball sees rates definitely dropping around the end of the year as the stock market will fall another 15% over the next 3 to 4 months, mainstream banks will discover problems with low-doc loans that they didn't 'realise', business investment is going to drop dramatically - even if they could locate it, new employment positions will dry up and consumer spending will decrease as petrol prices bite further into the weekly paypacket. Start investing slowly in the market from end June onwards as investors crystalise losses for the FYE.

 

[Canteen Worker]

There is talk about the Aussie dollar gaining parity or even exceeding the American dollar. That may hurt exporters and increase imports in the process.

Those who hope to cash in their super soon also will be a little nervous!!!

 

[Dan]

either way I am happy having just signed up for a mortgage!

 

[Matabele]

There is talk about the Aussie dollar gaining parity or even exceeding the American dollar. That may hurt exporters and increase imports in the process.

  Great for Ebay users etc

 

[The Gronk]

[quote author=Canteen Worker link=topic=177272.msg181698#msg181698 date=1207715735]
There is talk about the Aussie dollar gaining parity or even exceeding the American dollar. That may hurt exporters and increase imports in the process.

  Great for Ebay users etc
[/quote]

And for people who are about to go and work in the staes whille being paid aussie dollars. 

I'll be a rich bugger for 3 months!!

 

[Matabele]

[quote author=Matabele link=topic=177272.msg181708#msg181708 date=1207717868]
[quote author=Canteen Worker link=topic=177272.msg181698#msg181698 date=1207715735]
There is talk about the Aussie dollar gaining parity or even exceeding the American dollar. That may hurt exporters and increase imports in the process.

  Great for Ebay users etc
[/quote]

And for people who are about to go and work in the staes whille being paid aussie dollars. 

I'll be a rich bugger for 3 months!!
[/quote]  yeah but you have to live and work in the States. 

 

[The Gronk]

yeah it will be good except for  all the americans that will be around. 

 

[ManlyBacker]

MB's crystal ball sees rates definitely dropping around the end of the year as the stock market will fall another 15% over the next 3 to 4 months, mainstream banks will discover problems with low-doc loans that they didn't 'realise', business investment is going to drop dramatically - even if they could locate it, new employment positions will dry up and consumer spending will decrease as petrol prices bite further into the weekly paypacket. Start investing slowly in the market from end June onwards as investors crystalise losses for the FYE.

Hope everyone is staying cashed up. Since I posted this a whole heap of stocks have taken a massive beating. Two days left this FYE and the rout continues, especially out of the US as the fuel price hits harder.
Aussie banks will have lower profits over the next 1 to 2 years but look exceptional value now. Most are below where they were just after 9/11, almost 7 years ago. Insurance stocks are also well priced. They will lay off staff and increase fees to keep profits on their books.
Wait until September for retail stocks like Woolies (for anyone who likes Dan Murphy's!) and Harvey Norman. They will post abysmal numbers next quarter and will be extreme bargains. Same probably for the health sector.
If you can wade in soon I think you will be smiling in 2 years and folks will wonder how you did it.
Keep in mind that I am not normally a doom merchant but I think it is going to get very tough and tight for a huge amount of Aussies over the next year and that will flow through to a lot of businesses.

 

[Matabele]

Good, I'm on the cusp of a major purchase.

 

[Jatz Crackers]

[quote author=ManlyBacker link=topic=177272.msg181673#msg181673 date=1207706754]
MB's crystal ball sees rates definitely dropping around the end of the year as the stock market will fall another 15% over the next 3 to 4 months, mainstream banks will discover problems with low-doc loans that they didn't 'realise', business investment is going to drop dramatically - even if they could locate it, new employment positions will dry up and consumer spending will decrease as petrol prices bite further into the weekly paypacket. Start investing slowly in the market from end June onwards as investors crystalise losses for the FYE.

Hope everyone is staying cashed up. Since I posted this a whole heap of stocks have taken a massive beating. Two days left this FYE and the rout continues, especially out of the US as the fuel price hits harder.
Aussie banks will have lower profits over the next 1 to 2 years but look exceptional value now. Most are below where they were just after 9/11, almost 7 years ago. Insurance stocks are also well priced. They will lay off staff and increase fees to keep profits on their books.
Wait until September for retail stocks like Woolies (for anyone who likes Dan Murphy's!) and Harvey Norman. They will post abysmal numbers next quarter and will be extreme bargains. Same probably for the health sector.
If you can wade in soon I think you will be smiling in 2 years and folks will wonder how you did it.
Keep in mind that I am not normally a doom merchant but I think it is going to get very tough and tight for a huge amount of Aussies over the next year and that will flow through to a lot of businesses.
[/quote]

When & at what price do you see buying into IAG, MB ?

 

[ManlyBacker]

IAG has been on the nose for ages and they should have sacked the Board long ago. As a current holder I have seen well over 40% wiped the last 2 years. They should have accepted the QBE bid. They have also been hit with some big payouts that you wouldn't expect to continue every year, except that I am a great believer in global warming causing probs for insurance companies as warmer seas kick up more and nastier cyclones/hurricanes. Even so, they have a franked divie at 8.4% at the mo which is better value than the best term deposit. With Australians really, really feeling the pinch I can see policy numbers dropping but they aren't involved in trading money so there is a safety factor that the other financials can't offer. I would of said they were a hold rather than a buy but there is value right now and I would put any price near $3 as ok, and making them a target for another takeover bid. I just don't know where they will grow except o/s acquisitions and they often turn sour. I would get excited if they merged with QBE as there would be some real savings and strength so if that becomes a possibility again I would buy.

 

[Matabele]

If you want to invest with brilliant medium term returns, I would suggest taking the opportunity to buy up the rural properties in areas of reasonable rainfall.

They are bottom of the market at the moment after 6 years of drought and banks are clearing them.  But with the carbon trading scheme less than 18 months away these properties are going to be worth a firtune once the larger bulk of the population wise up to the possibilities. 

 

[Jatz Crackers]

Great detail. Thank you MB.

 

[Guest]

if rates are to drop to 6% as indicated then this means that our economy and probably that of the US and Uk are in for a hard landing this year.  

Consider also this artcile:

Barclays warns of a financial storm as Federal Reserve's credibility crumbles

US central bank accused of unleashing an inflation shock that will rock financial markets, reports Ambrose Evans-Pritchard

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

Strategists at Barclays accuse Ben Bernanke of a policy blunder
RBS issues global crash alert
Read more by Ambrose Evans Pritchard
The grim verdict on Ben Bernanke's Fed was underscored by the markets yesterday as the dollar fell against the euro following the bank's dovish policy statement on Wednesday.

Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington's easy-money policies.

The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year.

Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.

"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."

Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points. The currencies of trade-deficit states like India should be sold. The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.

David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said.

Gazprom chief expects 'radical' change in oil price
The bank said the full damage from the global banking crisis would take another year to unfold.

Rob McAdie, Barclays' credit strategist, said: "The core issues have not been addressed. We're still in a very large deleveraging cycle and we're seeing losses continue to mount. We think smaller banks will struggle to raise capital. We're very bearish - in the long-term - on high-yield debt. The default rate will reach 8pc to 9pc next year."

He said investors had taken their eye off the slow-motion disaster engulfing the US bond insurers or "monolines". Together these firms guarantee $170bn of structured credit and $1,000bn of US municipal bonds.

The two leaders - MBIA and Ambac - have already been downgraded as the rating agencies belatedly turn stringent. The risk is further downgrades could set off a fresh wave of bank troubles. "The creditworthiness of many US financial institutions will decline in coming months," he said.

The bank warned that engineering and auto firms we're likely to face a crunch as steel and oil costs surge. "Their business models will have to be substantially altered if they are going to survive," said Mr McAdie.

A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.

Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".

He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.


http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/27/cnbarclays127.xml&CMP=ILC-mostviewedbox

 

[ManlyBacker]

If you want to invest with brilliant medium term returns, I would suggest taking the opportunity to buy up the rural properties in areas of reasonable rainfall.

They are bottom of the market at the moment after 6 years of drought and banks are clearing them.  But with the carbon trading scheme less than 18 months away these properties are going to be worth a firtune once the larger bulk of the population wise up to the possibilities. 

I agree. I remember going through Warwick in SE Qld 15 years ago and they were in the throes of a long drought and huge tracts of land were going for about $100 an acre. Not so today! I don't know all the details of the CTS but you have to support any effort towards greening the planet and getting paid for it. Remember, if borrowing, that the ATO test on land being purchased for INCOME PRODUCING purposes (and claiming any costs post set-up) can be a slight minefield so do the homework carefully. Any suggestions Mata for good areas?

 

[Matabele]

There is a lot of concern out here that the carbon credit thing will see a lot of property purchased that will be taken out of food production.  And if food supplies drop, prices go up, farm prices also go up because demand for them increases - replicates the mining boom in some ways.

But the concern in country areas is that there are no jobs in properties used for carbon trading. There will be a short term boom while things are planted but after that country areas will die off - fewer jobs flowing through to all the other industries and the young will go into metropolitan areas even more.

If you ask me we should look at shifting far more production up north where there is water.  But to ensure supply it would need a big infrastructure investment in rail to make transporting product south efficient and off the highways.

In that scenario you'd be looking for land in the temperate areas.  NSW seems to have the best mix of space and rainfall.