Business News

Uncertainty means rates should be cut

| More

by Peter Switzer

If good sense prevails, the RBA will cut interest rates today. If rates are not cut, the board is dominated by dopes — plain and simple.

Despite my belief that we will get out of this tight bind created by the nincompoops in Europe, it will still be a close run and that’s why a sensible RBA board would say, "Let’s give the local economy another pre-Christmas shot in the arm to keep the small improvement we’re seeing in confidence on an upward roll".

A fair analysis of the run of recent economic data would say that there is still a lot of weakness and reticence to spend but confidence — consumer and business — is starting to head up. That said, we have been taken down to low, even depressed, levels.

The latest Sensis Business Index, which has been a good barometer for the small and medium business sector, proves the point.

“We have seen a reversal of the sharp declines experienced last quarter. However, these improvements are coming from a low base, particularly profitability which was at a record low last quarter,” said Christena Singh, who runs the survey. “While small businesses are expecting conditions to improve further this coming quarter, Christmas trading is expected to be down on last year.”

Ratings downgrade watch

The irony of the EU situation is that the string economies are heading for a ratings downgrade by virtue of the fact that they are likely to save the plodders in debt and that puts them at great risk.

Standard & Poor’s has virtually said this overnight putting 15 of the Eurozone nations on negative credit watch. Initially it was reported only six countries would be put on watch.

“This is a natural consequence if France and Germany bails everyone else out because the EU is a fully shared fiscal and monetary union,” said Brian Battle, director and vice president of trading at Performance Trust Capital Partners. “You’ve taken a currency union and married it to a fiscal union without realising the consequence of the behavior—the economic reality has caught up to the political dream [of the EU] and we’re seeing that clash happen.” (CNBC)

Until the S&P view was made public, Wall Street was in triple digit positive territory and had been helped by the announcement that Angela Merkel of Germany and France’s Nicolas Sarkozy had agreed on a plan to settle the eurozone’s debt woes ahead of the crucial summit in Brussels later this week. That’s a big step that could cement the foundations of the current rally.

More euro news

Stocks had been trading higher for most of the session after France and Germany's leaders said they had completed an agreement on a plan to help resolve the eurozone debt crisis ahead of a crucial EU summit later on this week.

This follows the IMF giving a tick to a 2.2 billion euro loan for Greece and Italy’s new PM revealing his 30 billion euro fiscal reform strategy.

The package aims to raise more than 10 billion euros ($13.4 billion) from a new property tax, impose a new tax on luxury items, crack down on tax evasion and bring forward measures to increase the pension age.

In the US, there were slightly disappointing services sector readings and factory orders but nothing dramatic.

Rate cut needed

Meanwhile, the latest reading on the Chinese services sector shows more evidence of slowing and could mean the China slowdown is harder than I thought. That said, these guys can take measures pretty quickly to re-stimulate their economy.

That said, with Europe the way it is and China slowing quicker than expected, a rate cut today is a must. I only hope the RBA boss, Glenn Stevens, sees it this way. Go Glenn!

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, December 06, 2011

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Ignore stupid recession headlines

So what happens this week?

Suddenly, Wall Street went positive – what just happened?

Be warned – things will get better!

News, news, news: the good, the great and the unimportant