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Falling stocks could help

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by Peter Switzer

I can’t believe I am about to write this, but a couple of bad days on the stock market could stop the Reserve Bank from raising interest rates next Tuesday. This follows some fairly impressive business investment figures this week.

To explain my unusual reasoning that stocks falling could be a ‘good thing’, let’s start with the CAPEX or investment figures.

Mining investment boom

A guy who I christened Mr Interest Rates over a decade ago because of his big calls on interest rates, Rory Robertson from Macquarie Bank, tells us the odds on an interest rate rise next week have tightened.

He points to the strong fourth quarter Capital Expenditure report, where mining investment for the 2010-11 financial year is forecasted to rise by a whopping 38 per cent.

Breathtaking potential

Robertson and his economist colleague, Brian Redican argue that firms expect business investment to remain very strong in 2010-11 and this is vital as it suggests that investment will take over from housing construction and government spending as the main drivers of growth in 2010. Indeed, the potential strength of building investment in 2010-11 is truly breathtaking.

Overall, investment in 2010-11 is expected to be up by around 20 per cent. However, firms' first estimate of buildings and structures investment for 2010-11 is more than three times the first estimate of 2005-06. That is, it has tripled in five years, despite the disruption of the Global Financial Crisis. The mining sector is — not surprisingly — leading the way, but manufacturing and other industries are proving to be surprisingly resilient in terms of their planned spending.

To raise or not to raise rates

According to Robertson, this news would make the RBA more certain that generational low interest rates are unnecessary and need to be jacked up to make sure inflation does not turn up in 2011 and beyond.

“The bottom line remains that I’ll be very surprised if the RBA next Tuesday does not decide to continue its 'normalisation' process,” he concluded. “After all, it’s already paused for nearly 90 days after having hiked three times in just 60 days.”

I hope Robertson is wrong but after these numbers I suspect he has a very good chance of keeping his pretty good predictive reputation intact.

Market spooks

The above is what I wrote for my editorial on my Sky Business channel program, SWITZER, but then I woke up to a pretty bad night on Wall Street, with stocks having their worst day in three weeks with jobless claims and Greece's debt problems spooking the market.

The latest reading of initial jobless claims spiked 22,000, which much more than expected. Also orders for durable goods — cars, white goods etc — fell 0.6 per cent in January while economists had tipped a one per cent rise.

And then throw in more Greek grumbling with ratings agencies hinting at downgrading the country’s debt, which could mean defaults and a bigger bail out.

Also, there are parasites out there betting that Greece will default and the US Fed is investigating as this was the kind of crap that nearly KO’d the world’s biggest insurer AIG!

Not out of the woods

Regular readers know that I am a card carrying optimist but I am a realist too and we are not out of the uncertain economic and market woods yet. And while our China and mining future looks bright, I want the period of interest pause extended until we are actually out of the woods and a spot of stock market anxiety over the next few days could de-vibe the apparent, over-excited Reserve Bank.

For advice you can trust, contact Switzer Financial Services.

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Published on: Friday, February 26, 2010