Glenn Stevens gave a wide-ranging interview to The Australian which was published over the weekend.
It gave an insight into the RBA governor’s thinking and also gave some handy tips for markets and traders as to where Australian and global markets might head in the months ahead.
Here are five things we think might surprise you.
1. On Australian monetary policy
Stevens made it plain more than once that there was going to be a language change soon around the “period of stability” highlighting that:
“Well we haven’t defined what the period of stability is and indeed, as my remarks from last week should make clear, I think before too much significance gets attached to that language we’ll probably think about shifting to something not quite so specific. But at this point we haven’t defined what the period is, it’s already been almost a year, market pricing is for not much to happen for some time yet. I’ve got no particular view to report about that sort of expectation at the moment.”
To reinforce this point toward the end of the interview, Stevens said there was too much focus in markets on specifics. Stevens said the RBA gave guidance in ranges rather than point forecasts because:
“I think there’s too much focus in the markets and in the media on what’s the central number and whether it moved by two tenths or something. There should be more focus on what’s the size of the range and are we getting outcomes that are broadly within that range or not? I’d rather see more discussion along those lines.”
He also noted that it was too early for Australian interest rate rises.
2. All the focus on consumer confidence since the budget could be a waste of time
This one is very instructive if you are a marketer, in advertising, the purchasing manager trying to decide how much stock to buy, or just spruiking your product outside your store. It’s also why I focus so much on the number of employed people in the economy.
Stevens implicitly said the consumer confidence and sentiment data we receive either weekly or monthly is less important than we all think.
On the relationship between confidence and spending, well actually my recollection of the empirical studies in the past year is that, if you know income and the usual variables that we think of as explaining consumption and then you add the information about confidence, there’s very little additional explanatory power there.
“Very little explanatory power” is statistical speak for it just doesn’t add anything to the equation. Which of course doesn’t mean it’s not actually important, just that other things are more important.
But the current move could be, and probably is, important because he says “low-frequency moves in the confidence indexes do have some association of the broader business cycle of frequency. So at that frequency, that business cycle frequency, they’re at least giving you information that’s consistent with other things and therefore perhaps telling you something.”
That’s why the lack of bounce in consumer confidence at the moment could be very important even though Westpac reckons it will come back.
What Stevens focuses on is income and household balance sheets and the wealth effect.
3. Stevens is really positive about Australia’s economic future
This probably isn’t to much of a surprise but the way that Stevens framed it made it somewhat remarkable.
When asked about John Edwards’ recently published book, which said that the mining boom had been overplayed, Stevens said:
“What I would say is I was very pleased to see there’s another optimist out there because I felt lonely in the optimist camp, over quite some years now. And our message I guess is, in terms of the trade boom and all the things associated with, it is a big deal. But the economy has actually coped with it quite well so far. Unlike other occasions where we’ve had very large terms of trade gains and associated investment booms, we have not really had serious widespread overheating in the economy as a result of that. That’s actually new.”
This means the adjustment phase – transition in the economy – is easier than many anticipate. Stevens highlighted that:
“Our message is that it was a considerable challenge to manage. We’ve managed significant parts of it already, I think quite well. I think we can manage the next phase as well, quite effectively, but the truth is there’s legitimate uncertainty about how smooth that will be at this point in time and really, that’s inevitable.”
Looking more immediately, Stevens highlighted that the Australian economy faced uncertainty but the important “macro-economic frameworks, which I think has also been a factor in helping” were in place to aid the necessary transition. But he also noted, as he did numerous times throughout the interview, that the Aussie dollar was too high, saying that the exchange rate needed to do “what it’s supposed to do”.
4. Australia is not a safe haven and the Aussie dollar will decline
Over the past couple of years there has been a chorus of claims that the Aussie dollar has changed its spots and moved from the realms of a risk asset to a safe haven asset. Stevens doubts this is the case even though he recognises that Australia’s AAA staus puts it in an elite global club and has been responsible for “some reallocation type flow.”
Part of these flows is the AAA rating, part is a sound economy “by global standards”, solid banks and government finances in good condition with “compared with the case in many other countries.”
Specifically on the notion of safe haven, Stevens says:
“I think what safe haven normally means is that when there’s a sudden risk event, people run to the haven. I’m not sure whether I’d be willing to say that we’re going to be the recipient of those kind of flows in a kind of a major ‘risk-off’ event. I suspect we might well see the Australian dollar go down in such an event, time will tell.”
Stevens believes the time is coming when a market disruption will occur – most likely as a result of the Fed raising rates – which will test this safe haven meme.
“And at some point I expect people will start to focus on that and we could expect I think that when that day comes and starts to get closer even, the likelihood of some disruption in markets is probably pretty high because it always is when the Fed eventually changes course. And that will be the case even though they will be very careful and measured and signal and so on, as they’re doing. It continues to be my view that on most standard metrics that you could devise, it’s hard to see how most of those metrics would have the Aussie dollar quite this high. And that’s why we’ve said that our sense is that some of the investors are maybe underestimating the probability of a material decline at some point, but I can’t say when that might be.”
Elsewhere, to reinforce this view, Stevens highlighted that the taper was very different to the actual Fed raising rates and the very market disruption that would cause the Aussie dollar to fall seemed a high probability.
5. Australia needs to stop pretending it does not and has not had recessions
The conventional economic measurement of a recession which has grown up over the years is two consecutive quarters of negative growth. Stevens said this measure had been unhelpful in developing a narrative in Australia about the path of growth both in the past and in prospect.
“This is a thing I feel rather strongly about. We are creating a narrative here about the 23 years of no recession as though this is some miracle and, you know, we’ve sort of advanced smoothly without any setback, but that’s not really true. I mean we have had a few episodes of mid-cycle slow down, and we’ve had a couple of episodes where the economy contracted, but only briefly and they were shallow contractions and brief ones. We had one in the later part of 2000, and we had one as you’d well recall at the end of 2008 which could have turned out to be much deeper – and I actually thought it would be deeper at the time – but, we got back to growth quickly. So the down turns were shallow. We did see the rate of unemployment go up a percentage point or so,in both those episodes. The only reason they weren’t labelled recession is because the contraction happened to be all in one quarter, not spread across two.”
Just to reiterate at the end of this part of the interview, Stevens says again:
“It’s a myth really that this economy doesn’t have down turns, we do have them, we will have them. We happen by either good luck or good management, or both, to have had pretty shallow ones the last couple of times. Long may that be so, we should be doing what we can to give us the chance for the future down turns are short and shallow.”
It is a great interview worthy of a read of the transcript which you can find here.
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