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Shares rising, rates pausing

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by Peter Switzer

The Australian stock market will be up today with Wall Street ignoring more Spanish bulldust with investors focusing on good economic news. And President Barack Obama helped by making comments that helped natural gas producers and the thrill seekers in the nuclear industry.

Also US Treasury Secretary Tim Geithner made some sensible comments ahead of a G20 meeting in South Korea where he advised the key economies of the world to be “fiscally friendly”, which is code for “don’t withdraw stimulus too quickly”.

The comment could also be interpreted more widely to advise: “Don’t hit your best export earning companies too hard with big taxes and don’t raise interest rates too fast”.

Not out of the woods

Of course, he’s not advising Australia because we’re a five star economy, which is in really good shape on an international comparison basis. However, there could be some lessons for us from the general advice Geithner has given to the large number of basket case or two star economies out there.

And that is don’t get too far ahead of yourself just yet as the European debt debacle shows we’re not out of the woods yet. I reckon we can say that some time in 2011 and that will be when the Yanks have the guts to raise interest rates. Ben Bernanke won’t try that stunt until he’s sure that America is on a solid growth base and Europe is recovering.

Christmas rally

My feeling is the markets can go higher but doubts will be around for a few months so short-term traders could take the market up before testing it again. However, by the final quarter of this calendar year I reckon we will see a Christmas rally, which will be based on the improving outlook for 2011.

As I argued before, this dip has been a buying opportunity for long-term investors.

Helping us will be the Reserve Bank, which should keep interest rates on hold for a period longer than expected by a lot of economists.

Slowing economy

Yesterday, we got the latest reading on the Aussie economy and we have not been shooting the lights out with the three months to March recording economic growth of 0.5 per cent.

The Yanks would take this reading and multiply it by four to say growth is at an annual pace of two per cent. Back in the December quarter the figure was 1.1 per cent, which translates to 4.4 per cent for the annual pace.

Now correct me if I’m wrong but it looks like this economy that was worrying the Reserve Bank enough to hit us with six rises in eight meetings has actually slowed down appreciably.

And this is a reading that ended in March and so we have had two more interest rate rises on top since this ordinary economic growth figure was recorded.

The next quarter will have all of this resource tax and European debt stock market negativity, which also comes as consumer and business confidence have gone off the boil.

Interest rate hikes over the top

These numbers make me worry about the private sector when you see the biggest contribution to growth came from public sector investment, which kicked in 0.7 percentage points. Household consumption only added 0.3 percentage points but business investment took 0.6 percentage points off the growth rate.

This is not a sign of massive strength for the private sector and it makes you wonder if six interest rate rises since October were over the top. Stop wondering — they were!

I reckon the Reserve Bank board should look at these numbers today and do a collective “D'oh!”

The conclusion has to be that this interest rate pause should be a long one and that will help our economy as well as the companies whose shares we buy.

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, June 03, 2010