Business News

Rates should fall to help stocks

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by Peter Switzer

Wall Street finally succumbed to gravity with stocks down for a change as the Yanks cheer a sensational quarter for stocks. The S&P 500 is now up 11.8 per cent for the quarter. However, slowdown news just about everywhere will be the new challenge in the June quarter, which has a history for being pretty bad.

And now the Reserve Bank has another chance to give the non-mining part of the economy a chance to grow when the board of the Bank considers an interest rate cut next Tuesday.

The Review in review

It comes as the Bank released its Financial Stability Review yesterday and it looks like households are avoiding mortgage arrears, which is good news. You'd expect this because we've given up our ‘shop til we drop’ ways, instead becoming serious savers but that’s not good news for retailers.

Not surprisingly, the RBA notes that the corporate insolvency rate is approaching the peak of 2009 and that was when we were confronting the GFC and the threat of a possible global depression and so why are we looking at this kind of business problem now?

Could it be the inappropriate interest rate policy of the RBA?

We also learn from the Bank that tight financing conditions are being experienced by property developers.

This is a pretty calm way of describing the devastation that is being felt by this sector and I just ponder how long the board will ignore the weakness in some 80 per cent of the economy?

Experts say the Bank won't cut next week but will wait for the next inflation reading later in April but I reckon the longer nothing is done to help the economy, the higher unemployment will go and this will not only be a memento of the Bank's incompetence but testimony to how out of touch it is from the real world.

The irony is that if unemployment heads higher this will be another nail in the coffin of the Gillard Government, though they can't be blamed for this stuff-up!

Wall Street concerns

Just for the record, the reason why the Dow was down 71.52 points, or 0.54 per cent, to 13,126.21 and the S&P 500 was off 6.98 points, or 0.49 per cent, to 1405.54 was slowdown news.

Here’s what worried Wall Street:

Oil prices fell to around US$105 a barrel as reports said supply is likely to increase with the likes of the US expected to release oil from its strategic reserves.
Spain went into its second recession in three years.
UK growth contraction was more than expected.
In the US, durable goods orders went up in February but less than expected.
And business investment plans were up but less than expected.

No cut expected

I think there are plenty of reasons for the RBA to cut next week but I suspect it will stick to its preference to fight high inflation that does not exist in preference to helping an economy where many industries are fighting slowdowns and maybe even recessions!

By the way, if rates fall and the banks pass them on, then the dollar could fall and this would help stocks but we then would have to cope with a possible global slowdown, which would not help.

That said, rate cuts are needed for the economy and eventually they would help stock prices.

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Published on: Thursday, March 29, 2012