Australia Cuts Rate .25%, Core Inflation on Weakest Pace in 14 years; China PMI Lowest in 3 Years; Wen Pledges to "Firmly" Maintain Property Curbs

The Reserve Bank of Australia cut rates .25% as housing weakens and core inflation was a tame .3%, the lowest in 14 years.

I have been saying for quite some time the next move would be a cut, and here it is. I expect more, as do interest rates futures, but some others do not see it that way.

Please consider RBA rate cut sparks bank response
The Reserve Bank of Australia has cut interest rates for the first time in more than two and a half years, bringing relief to households and corporate borrowers.

The Australian central bank today lowered its key cash rate by 25 basis points to 4.5 per cent. The move reversed the increased imposed on Melbourne Cup Day last year, the most recent time the RBA has shifted rates.

More to come?

Some economists say the moderate language used in the RBA's accompanying commentary suggest today's move may be a one-off by the central bank for now.

"There are no hints in the statement that the RBA is considering further moves at this time," said HSBC chief economist Paul Bloxham. "In large part it seems to be characterised as a shift back to 'neutral' given that the inflation concerns that the RBA had previously seemed to have dissipated."

Financial turmoil

RBA Governor Glenn Stevens noted that recent sharp moves on financial markets were likely to drag on Australia's economy. "The effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," he said in a statement accompanying today's decision.

"Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation. With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2-3 per cent inflation over time," he said.

Last week, core inflation data - the measure watched by the RBA - slowed to 0.3 per cent in the September quarter, the weakest pace in 14 years.

Financial markets were earlier today pricing in four cuts of today's size over the next 12 months, with three more now to come. That estimate remains little changed after the verdict.
Expect Australian Dollar to Weaken

The Australian dollar weakened from 1.10 to .94 in the "risk off" trade but soared back to 1.06 in October in the "risk on" trade. If Australian housing and retail sales weaken, and I expect both will, look for more cuts by the RBA, sooner, rather than later. In turn, rate cuts will put downward pressure on the Australian dollar.

China PMI Drops to Lowest in Almost 3 Years

Bloomberg reports China PMI Drops to Lowest in Almost 3 Years
A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy.

The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

An index of export orders contracted for the second time in three months as Europe’s failure to resolve its debt crisis dims the outlook for shipments to China’s biggest market.
Weakening PMI Suggests Weakening Commodity Prices

Exports are down because of the slowdown in both Europe and the US. Europe is clearly in recession, the US headed towards recession. Moreover, the Chinese slowdown suggests more weakness to come in commodity prices which should be good for the US dollar.

Chinese PM Pledges to ‘Firmly’ Maintain Curbs

Bloomberg reports China’s Property Stocks Decline as Wen Pledges to ‘Firmly’ Maintain Curbs
China property stocks fell for the first time in six days in Shanghai trading after Premier Wen Jiabao doused speculation the government will ease curbs on the industry.

The government will “firmly” maintain restrictions on real estate and local authorities should continue to strictly implement its policies, Wen said according to a statement following a State Council meeting.

Treadmill to Hell

China is on “a bigger and faster treadmill” than ever as property sales slow, Jim Chanos, president and founder of $6 billion hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview from Singapore on Oct. 28.

Chanos has forecast since at least February 2010 that the property market will slump, saying that China is Dubai times a thousand and on a “treadmill to hell” because of its reliance on real estate. Property transactions in the past two months in so-called tier one, two and three cities his firm tracks are down 40 percent to 60 percent year on year, said Chanos, who predicts “the property slowdown or worse has started.”

The hedge-fund manager’s views are at odds with those of Stephen Roach, non-executive chairman of Morgan Stanley Asia, who said in New York last week that the government has had some success in deflating a housing bubble and that concerns of a hard landing are “overblown.”
Expect Property Bubble Implosion

I will side with Chanos over Roach. China's property bubble is the largest in the world and it will crash hard. Once again, the bursting of the Chinese property bubble as well as the credit bubble suggests more weakness to come in commodity prices.

Mike "Mish" Shedlock
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