EMERGING FROM EMERGENCY

RBA Governor Glenn Stevens sent a clear message today by raising the benchmark rate by 25 basis points despite no evidence of inflationary pressure on the near horizon and stubbornly high unemployment . That message is simple: with the Australian economy still standing firmly on its feet, the time for emergency measures has passed. Unlike the state of “permanent emergency” that Japanese bankers operated under in the first half of this decade, and in which the US appears to be hunkering down for an extended stay, the Australian central bank’s approach has been surgical.  The equity markets responded approvingly to the action, with the ASX All Ordinaries rising by 40 basis points while the Australian dollar, already up nearly 28% against the US greenback, rose to USD 0.8914.

There is no question that leaving rates lower for a prolonged time could only encourage Australian consumers to keep spending, as well as help the still recovering real estate markets, but the discipline that Stevens and his team are displaying now is admirable.  Perhaps overseeing an economy that is so sensitive to commodity price fluctuations due to robust mining and agricultural export makes Stevens particularly focused on avoiding inflation.  Or perhaps seeing his nation avoid recession due to the hard-line policies of the past (recall that his rate raises in 2008 had some political hacks calling for his head) has provided him with the confidence to make choices looking towards the future rather than politics of the present.  Whatever the sources, his professional integrity and proactive stance sits in stark contrast to many of his G20 peers.

Although we sold our position in Australian equities yesterday, we continue to rate the market there as one of the most structurally sound and will remain focused on opportunities to go long again as dictated by price action.

The week ahead may well provide us with several catalysts for entry points.  This evening Housing Finance figures for August will be announced, while tomorrow night the unemployment rate for September will be published  --with consensus forecasts anticipating a 20 basis point increase to 6% over August.  Stevens has already signaled a willingness to raise rates into rising job losses but, with the overhang from lost construction and real estate jobs and a strengthening currency to weigh on exports, some investors may get cold feet. We will not.

Andrew Barber

Director

EMERGING FROM EMERGENCY - a2