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Good news threat

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by Peter Switzer

The biggest threat to average Australians this week could be good news! That’s right, a run of good news could make the Reserve Bank feel vindicated in raising interest rates and prime them for another hit, not in December, but possibly February.

I noticed the AFR tried to sell newspapers on the weekend by spooking mortgagees with the big nine per cent headline and while this is a real possibility over the next two years, it’s not a certainty. Also the timing could be three or four years.

The RBA view

The Reserve Bank could be of the opinion that Wall Street is about to head up. The QE2, the mid-term election result and the history of stock markets from November to April could explain their bullish outlook on financial markets and the confidence effects they have.

The Big Bank could have a three-year or even longer positive view on the Chinese economy that will keep our economic growth, driven by the mining and related sectors, on the strong side. The Bank is working off a view that the dollar will be around parity for three years!

On top of these two big positives, unemployment inexplicably continues to fall and the latest number is out this week. I believe it has been this number most of all that has given the RBA the confidence to raise interest rates so rapidly and ridiculously.

This is why I think some bad news might slow up the Reserve’s fanatical fear of future inflation. Remember current inflation is at the low end of the two to three per cent target band that the Bank watches.

Job strength

At the moment a lot of economists are surprised at the strength of our labour market given manufacturing and the services sector are officially contracting. This latter sector employs about 80 per cent of the work force and so the fall in the jobless rate is a real head scratcher.

Tourism, thanks to the dollar, as well as retail and the building sector thanks to interest rates, are all in the doldrums, so putting it altogether we can see the big part of the slow speed economy is struggling.

That’s why I hope the statistical news out this week — jobs ads (Monday), NAB’s business survey (Tuesday), housing finance (Wednesday), consumer confidence (Wednesday) and unemployment (Thursday) — show that the economy isn’t going gangbusters.

I clearly don’t want bad news but I would like the stats to bear out what the industries are telling me.

Santa Claus rally

Over in the US, there aren’t many big numbers due out to spook or spark the market but after last week’s big news events it looks like it’s only a matter of time before the market takes off again. Sure a pullback could pre-date it but the ducks seem to be lining up for a US-style, Santa Claus rally.

Last week the Dow was up 2.93 per cent and is now 9.74 per cent higher for the year. Also the fear index or VIX is at 18.26, which is another nice omen, with an under-20 reading seen as positive for the market.

For advice you can trust, contact Switzer Financial Services.

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Published on: Monday, November 08, 2010