December | 2014 | Strayanomics

I’ve recently started in a new job, so the pace of posting here at Strayanomics has slowed markedly from its pre-employment levels. My intention is to keep up with the monthly interest rate posts, the value of which I hope is now beyond doubt, along with sporadic commentary accompanying noteworthy events, when time permits.

Japan’s election this weekend is likely to be one such noteworthy event. I highlighted the potential ramifications of this election in my November interest rate update:

As I have argued in the past, Japan’s currency devaluation raises risks of a large-scale shift back to nuclear power, since the economics of importing energy is very poor when they have so much capital invested in a cheaper alternative. Prime Minister Shinzo Abe favours restarting the reactors, but public opinion remains largely hostile to this, given the Fukushima disaster. Japan’s snap election on December 14 could therefore turn out to be of considerable importance to the fortunes of Australian LNG; a strong mandate for Abe would likely see him press ahead with reactor restarts, adding more pressure to LNG spot prices.

A strong mandate appears to be what Abe will receive from this election. From Bloomberg:

Prime Minister Shinzo Abe’s ruling coalition won Japan’s general election, according to an NHK exit poll, which also indicated the bloc may maintain its two-thirds majority in the lower house.

The coalition of Abe’s Liberal Democratic Party and junior partner Komeito will win between 306 and 341 seats in the 475-seat chamber, public broadcaster NHK projected after voting ended at 8 p.m. That compares with the 325 seats the coalition held before the election. Turnout was set to fall to a record low on a combination of voter apathy and heavy snow in parts of the country.

Indeed, very low voter turnout is a big issue for the LDP. Nevertheless, this win has prevented a roadblock being thrown in the path of Abe’s plan to restart nuclear reactors next year, so it seems certain now we’ll see just this.

Japan is of course a key buyer of LNG, so a large-scale resumption of idled nuclear reactors means more stress for Australia’s burgeoning yet already beleaguered LNG industry.

Back in August, when I began recording my thoughts on Australian interest rates in detail, institutional economic research teams were in unanimous agreement that we wouldn’t see the RBA cut interest rates any lower. In my impudence, I dissented.

Here were some of the forecasts for the first hike at the time:

AMP – Q1 2015
Barclays – Q1 2015
CBA – Q1 2015
Moody’s – Late Q1 2015
St George – Q1 2015
StanChart – Q1 2015
TD Securities – Q1 2015
HSBC – H1 2015
Nomura – H1 2015
ANZ – Q2 2015
Citigroup – Q2 2015
UBS – Q2 2015
JP Morgan – Q3 2015
Westpac – Q3 2015
RBC Capital – Q4 2015
Goldman Sachs – Q4 2015
NAB – Q4 2015
Bank of America-Merrill Lynch – Q1 2016
Macquarie – Q1 2016
BNP-Paribas – 2016
Deutsche Bank – 2016

It therefore came as a small victory for this humble blogger when two of those shops abandoned their rate hike forecasts this week, and now expect cuts. Perhaps unsurprisingly, the two banks to catch my disease were among the least bullish on the timing of rate hikes.

Deutsche was first out of the gates, revealing they now expect 50bps of cuts next year, with the first in Q2:

Chief economist Adam Boyton believes the strength in the housing market that has been supporting the economy is easing.

“When we combine that with our expectations for the unemployment rate – which is that it will rise all the way through next year – all that suggests to us that there is scope for the RBA to cut rates further,” he told ABC News.

The call runs against most other economist forecasts.

Indeed it does. But perhaps not for long. Following poor national accounts data today, Goldman switched to cuts, with the first coming in March:

Goldman Sachs re-joined the bear pack on Wednesday, forecasting a 25 basis point cut in March and another in August.

“Although third-quarter GDP growth was consistent with our forecast . . . we are shifting our view on interest rates back to interest rate reduction in 2015,” the investment bank said.

“Nevertheless, revisions to the back data and the composition of the GDP data were sufficiently poor to tilt the balance of probabilities towards a rate cut in the first half of 2015 as our base case,” it said.

And NAB is leaving the window open:

National Australia Bank’s senior economist David de Garis said on Wednesday that if leading indicators for the current quarter prove erratic, the central bank might consider more easing.

“The RBA can take some comfort from recent indicators on the economy suggesting that the pace of growth has picked up to some extent,” he said.

“Should such indicators show signs of faltering, then the RBA would need to address whether the current stance of monetary policy is sufficient to aid the economy’s transitioning to higher domestic non-mining growth,” he said.

Late Q1 or early Q2 next year has been my forecast for the first cut (see here, here and here), so it’s a welcome change to have a few professional allies in what was becoming a fairly lonely position.

One by one, they’ll all come around. Though perhaps not Paul Bloxham of HSBC. The poor chap has been predicting rate hikes since 2011, shortly before the RBA started chopping away at the cash rate, taking it from 4.75% all the way down to its current 2.5%.

And it hasn’t stopped yet.

Strayanomics

Monthly Archives: December 2014

Abe set for landslide win

The disease spreads