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The next move

After the interest rate rise here in Australia, investors, those in debt and those thinking about parking their dough in interest-bearing securities might be asking themselves - what next?

Knowing the answer to this question helps to make big decisions such as: Should I escape the stock market? If so, escape to what? And will this affect the housing recovery?

Australian story & the Yankee tale
There are two parts to these answers, which could help you make your plans - the Aussie part and the US part.
Try catching a runaway!

In a scary, changeable world, I like to believe that China and India have at least a couple of good years ahead - it's not easy to stop runaway trains! And the best analysts believe Europe and Japan are in the early parts of their recovery, which should help global growth. In fact, the Reserve Bank put a strong global growth outlook into its monetary show-and-tell statement last week when justifying taking the cash rate of interest to 6%.

A word about oil

Against this, we have the Middle East spiralling out of control, with the Israel and Lebanon battle loading up oil prices and BP having to close down a vital pipeline in Alaska. Also hurricane season is looming in the USA and that could ensure oil prices at $US80 plus a barrel.

Keeping their cool

Some decent economists aren't phased about prices this high and think the global economy can keep on growing at respectable rates and that $US100 could be where the pain really hurts. I think many consumers would pull in their horns with the kinds of petrol prices we'd see at $US80 or so.

The supreme optimist

Even with all of this going on, Kevin Bannon, chief investment officer with the Bank of New York, told Bloomberg that he was optimistic that the US stock market would resume its defiance of gravity.

"The oil price rise is more contractionary than inflationary," he argued. And he expected the US central bank to stop raising interest rates for the moment at least and he was right.

In the USA, economic growth has come down from around 5% in the first quarter to a second quarter reading of 2.5%. And that's a big contraction.

Possible procrastination

Some experts are asking whether the Federal Reserve chairman, Bernanke waited too long to jump off the interest rate escalator and only time will tell. I suspect he has gone on too long but this pause should help the US economy recover to achieve reasonable growth and shares should turn positive.

Europe and Japan are earlier in the recovery cycle.
The lure of bonds

Bannon believes bonds are attractive given interest rates are close to the top of the interest rate cycle and for nervous types, this could be an option but it's a safe one, where you could miss out on near-term improvements in the stock market.

Too hot to handle

Back home and the Reserve Bank told us in its Quarterly Statement of Monetary Policy that it feared overheating based on spare capacity readings of the economy, strong employment, tax cuts and stimulating state government budgets on top of higher world growth and oil prices.

Right or wrong?

No official threat was made to increase interest rates but the between the lines readings made economists tip an October or November rise.

They could be right but they also could be wrong. October's inflation reading will be important.

The Big Bank said petrol prices are hitting discretionary spending but tax cuts and more jobs could more than compensate the income of households.

What Switzer will be watching

Our economic growth has been 3% to March where business investment was the main driver and so going forward I'll be looking closely at:

•   world economic growth rates
•   domestic excess capacity readings
•   retail sales
•   the June quarter economic growth
•   business investment
•   employment
•   oil prices

If you can't monitor these, then watch this space.

Published on: Sunday, September 03, 2006

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