Interest rate cuts - that's all there is folks: Pete Wargent

As expected interest rates were left on hold yesterday at 2.50% as announced by the Reserve Bank here. The wording of the release seems fairly clear - accommodative interest rates are doing their job and there probably won't be any further cuts to come unless the outlook shifts for the worse.

"The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet. The pace of borrowing has remained relatively subdued to date, though recently there have been signs of increased demand for finance by households. There is also continuing evidence of a shift in savers' behaviour in response to declining returns on low-risk assets."

In other words, people are pulling money out of savings and into other asset classes.

The easing cycle, which has been running for nearly a couple of years, has pumped up asset values, increasing our net worth substantially.

While the cuts took some time to gain traction, the 2 year XJO (ASX 200) chart shows the index sitting ~20% higher, while shareholders have continued to derive benefit from dividend streams. Good news for most superannuation balances.

Source: ASX

With extra cash at their disposal, Aussies have also plunged back into housing. Sydney prices up by 10% in 2013, while Melbourne and Perth have also seen decent growth. Hobart and Adelaide not so much.

Whatever people try to argue, the demand for housing is sensitive to interest rates and the RBA can see that its cuts have really started to bite in the major capital cities.

Source; RP Data

"By themselves the higher prices don’t worry the Bank. If they were associated with lower lending standards or a rush to greater leverage it would be concerned. But there’s little evidence they are just yet, and there’s unlikely to be evidence for some time. If there are such signs, further down the track, the Bank might might have to push up interest rates, but it’s a problem for the future. (And as far as the Bank is concerned, it’s a an easier to manage problem than the stagnation it had thought it was facing.)"

Elsewhere, retail sales finally showed some signs of life yesterday recording a 0.4% bounce for the month (it's odd being a Sydneysider who lives near Pitt Street Mall - cos there ain't no spending recession happening here, I can tell you). Must have been that election result.

Even the recession/housing crash cheerleaders seem to be losing a bit of heart of late after half a decade of predicting the end of the world.

The missing piece in the puzzle could be how the labour market fares as mining investment drops off. The unemployment rate has continued to sneak up to 5.8% last month and all Australians should want that troublesome trend to level off next year.

Source: ABS

In any case, the RBA's wording in its release yesterday is clear:

"The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet."

The easing bias is no longer there. Futures markets read the release the same way that I do: that could be that for the interest rate cuts.

While cash rate futures retain around a one in four chance of a rate cut on November 5, the implied yield curve suggests that the next move will likely be up, although not for a long time time to come yet.

Sounds about right.

Source: ASX

His new book 'Four Green Houses and a Red Hotel' was released on 1 September 2013.