From David Scutt at SMH:
A growing body of evidence suggests interest rate cuts from the Reserve Bank of Australia may be draining confidence in the economy rather than boosting it.
Key Purchasing Managers Index (PMI) figures released on Thursday showed a deterioration in Australian business conditions, impacted by what firms are describing as a general lack of confidence across the economy.
The Commonwealth Bank’s Australia “flash” Composite PMI produced in conjunction with IHS Markit, fell 2.6 points to 49.5 in August.
The Composite PMI surveys firms from manufacturing and services sectors, accounting for around 75 per cent of the Australian economy. Activity levels have only declined three times since the survey started in May 2016, the last time in March this year.
“Households are taking the lower cash rate as a negative sign, raising concerns about what is happening with the economy that we need interest rates to go even lower,” said Kristina Clifton, senior economist at the Commonwealth Bank.
Ms Clifton cited the ongoing trade dispute between the United States and China, the RBA’s rate cuts, and the drought as factors hurting confidence. “Businesses are feeling this pessimism,” she said.
The decline in the PMI data echoes a similar slump in consumer confidence in the wake of the RBA’s July rate cut, which took the cash rate down to 1 per cent. “That lines up with what we’ve seen in [consumer confidence] where we saw quite a sharp drop following the June and July rate cuts” Ms Clifton said.
The Westpac-Melbourne Institute consumer sentiment survey fell to its the lowest level since August 2017 that month. Confidence subsequently recovered in August following the RBA’s decision to keep the cash rate steady.
Consumer sentiment is trending lower but there is also a recent series of higher troughs. Breakout from the triangle will indicate future direction.
On the downside, new vehicle sales for July 2019 fell for the 16th straight month.
New vehicle sales are a leading indicator for the economy. Automotive Holding Group (AHG) is normally a useful bellwether for the overall ASX 200 index but its latest rally is distorted by a proposed merger with rival AP Eagers (APE).
The consumer outlook (below) is bearish, with family finances for the next 12 months down 6.5% (YoY) and the next 5 years down 5.3%. But one factor has definitely improved with the latest rate cuts: time to buy a dwelling (YoY) is up 16.7%.
Improving sentiment towards housing and rising auction clearance rates, albeit on low volumes, has helped banks, with ASX 200 Financials index finding support at 6000.
But UBS warn that further interest rate cuts would squeeze bank interest margins and may force them to cut dividends.
And a major threat is the potential cutback in business investment, because of the uncertain global outlook, and its impact on employment and consumer sentiment.
Iron ore is edging below support at $94/tonne, suggesting another decline to test support at $80/tonne.
Materials are undergoing a strong correction. Declining Money Flow peaks warn of strong selling pressure. Breach of support at 12700 is likely and would warn of a test of primary support at 10700/11000.
On a more positive note, REITs are enjoying strong buying pressure, signaled by Money Flow troughs above zero, as the scramble for yield intensifies. Breakout above 1700 would signal another advance.
With a bearish outlook in its two largest sectors, the ASX 200 is likely to follow. A harami consolidation above support at 6350/6400 is bearish and breach would warn of a strong decline.
With the uncertain impact of a trade war on the Chinese economy, we reduced our exposure to Australian equities to 20% of portfolio value on 19 August 2019.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
