The Good, Bad and the Ugly: Australian, U.S. and U.K. Economies

US Rates on Hold into 2010

The dollar weakened across the board following the announcement from the Federal Reserve that it is to keep rates at close-to-zero into 2010.

The continuation of the ultra-loose monetary policy confirms the Fed is willing to risk inflationary pressures for the sake of securing a stronger and sustainable economic recovery.

However, analysts did interpret the slight change in policy wording as an indication that the Fed had moved on from its ‘wait and see’ approach and is now planning to increase rates from the current 0.0%-0.25% band in 6 months.

Last month the Fed described the economy as “stabilizing”. This month the US Central Bank is clearly more optimistic and commented the recovery had “continued to pick up”.

Also reinforcing the differences in growth expectations between the US and UK the Fed confirmed it was to reduce its $200bn Freddie Mac (FRE) and Fannie Mae (FNM) mortgage debt purchase program by $25bn due to “the limited availability of agency debt”.

This compares to the £25bn extension of the Bank of England’s quantitative easing program also announced this week.

The US economy grew at an annualised rate of 3.5% in Q3, progressing 0.9% quarter on quarter. The UK economy contracted 0.4% in Q3 according to preliminary data.

Australia Hikes Rates Again to Keep Pace of Recovery in Check

For the second time in just a few weeks the Reserve Bank of Australia has increased rates by 0.25%. The RBS rate now stands at 3.5%.

The RBA Governor Glenn Stevens commented growth among Australia's major trading partners in the Asian region were experiencing "noticeably better" conditions and "Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets.”

The pace of recovery in Australia has surpassed most expectations and further rate rises are highly likely early in 2010 though the RBA may hold from further monetary action for the rest of 2009 as it digests ongoing data.

The Aussie dollar has gained sharply against the USD over the past year progressing from the oversold cyclical bottom of AUDUSD $0.60 to more than $0.90. Forward looking interest rate differentials are likely to maintain the current trend, or at least protect recent Aussie gains.

Chart: AUDUSD Weekly. Source: StockCharts

Bank of England Gives Up the Waiting Game and Adds another £25bn to QE Program

The BoE, faced with mounting criticism and a steady stream of predominately poor economic news gave up its ‘wait and see’ policy in relation to the £175bn of stimulus already injected into the banking sector and announced its intentions to print another £25bn.

The expansion of the quantitative easing (QE) program was expected by many analysts and Sterling actually jumped on the news with traders fearing the BoE might have committed another £50bn to the failed program.

The QE policy has facilitated the purchase of vast amounts of Gilts, government debt, from banking and financial institutions. The cash was then supposed to be passed on from the banks via lending and investment into the wider economy boosting jobs and economic growth.

However, the report attached regarding Lloyds Group (LYG) and Royal Bank of Scotland (RBS) highlights the fact much of the UK banking sector is still hamstrung from the 2008 credit crisis and is still structurally incapable of acting as a baton carrier for the BoE’s stimulus efforts.

The BoE also announced UK rates were unchanged at 0.5% and that the £25bn of additional stimulus would be injected into the banks over three months, half the pace compared to previous QE increases.

The QE program commenced in March with £75bn. £50bn was added in May. A further £50bn was added in August.

The UK is now the only major economy still is monetary easing mode and the vast majority of economists now predict the first rate hike will probably be executed deep into 2010 as opposed to during Q1 as previously expected.

The Labour government predicts a return to growth will occur “at the turn of the year”.

Comments

[Dave Wrixon:]

Given the choice I would sooner take a 0.4% contraction under the BOE rather than a 3.5% expansion under the FED. In the UK, house prices are moving forward as very substantial rate, and my brother who is a Building Surveyor tells me business is booming. Funny really seeing there is absolutely no tax relief on mortgages or house purchases this side of the pond.

Nov 08 12:58 PM

[swissfrank:]

There has never been a cheaper time to take out a mortgage (or maintain a variable rate one) in the UK. Inevitably, this has stimulated activity. Wait till the bar tab is finally presented for payment post the May 2010 election and post the end of government stimulus. Most Brits for the moment seem deluded and very ill-informed about what is coming if that country is ever going to deal with its debt.


On Nov 08 12:58 PM Dave Wrixon wrote:

> Given the choice I would sooner take a 0.4% contraction under the
> BOE rather than a 3.5% expansion under the FED. In the UK, house
> prices are moving forward as very substantial rate, and my brother
> who is a Building Surveyor tells me business is booming. Funny really
> seeing there is absolutely no tax relief on mortgages or house purchases
> this side of the pond.

Nov 08 01:27 PM

[ebworthen:]

Artificially low rates and a declining dollar value is inflation by proxy.

Nov 08 03:34 PM

[Teutonic Kn...:]

From a very simplistic and top-level perspective, my read is as below:

Australia will do okay because of its geographical proximity to China which is rising and hungry for her (Australia's) natural resources. Not that China does not have its own abundance of natural resources, they are smart to cash out the weakening dollar awash, to fuel their growth. Australia has that edge over Canada in this regard.

The U.S. Situation is buttressed by its vast landscape. The land is still there and remains available to grow food. This a giant fallback while taking time to recover in the industrial side of the house.

The U.K. does not have those advantages. Key manufacturing capabilities and capacities in auto, electronics, heavy equipment, optics, computers, communications, have long declined. The British Isles soil is thin and which was the driving force for pushing building up the British Empire (1600-2000) to begin with, as it was seeking to export its culture and its people. The financial crown jewel that it wrestled from the Dutch several centuries ago is now in peril.

TK

Nov 08 04:55 PM

[taojaxx:]

Australia is growing because China is growing and buys its commodities. RBA hiking rates is like the little kid waving his arms when the orchestra gets loud and thinking he's conducting it. All they'll get is more carry trades, AUD appreciation with little impact on growth as commodities are priced in USD ( and shortly in yuan?).

Nov 08 08:41 PM

[Teutonic Kn...:]

taojaxx - - -

Perhaps another point of interest that came to my mind is the parallel between China/Australia and United States/Canada in the realm of industrialization. During the last century of 1900-2000, as America ramped up its Industrial Revolution, Canada because of its geographical proximity, naturally had become the "Backyard of the United States", supplying all sorts of natural resources, - be it timber, paper, minerals, oil, natural gas, coal, asbestos, hydro electric power, and even fresh water, to name a few.

And during the post-WWII decades of 1950-1970, the United States virtually soaked up all Canadian industrial enterprises by setting up subsidiaries, branch plants, and assembly plants. For many years until of late, this arrangement had worked very well as Canadian workers would enjoy almost the same benefits and pay as their American counterparts, with the "Loonie" hovering around the 90 cents to the US Dollar mark, as if to say Canada is at about 10% discount of its US equivalent goods and services in every walk of life.

There is a similarity emerging here with Australia to becoming that "Backyard of China". The recent appreciation of the $A and their central bank raising interest rate are indicative of such a trend.

Just a thought!

TK


On Nov 08 08:41 PM taojaxx wrote:

> Australia is growing because China is growing and buys its commodities.
> RBA hiking rates is like the little kid waving his arms when the
> orchestra gets loud and thinking he's conducting it. All they'll
> get is more carry trades, AUD appreciation with little impact on
> growth as commodities are priced in USD ( and shortly in yuan?).

Nov 08 09:53 PM

[taojaxx:]

TK,
I'm not too good at geopolitics. My reaction would be these are not comparable pairs: Canada US were both on an ascending part of their historical cycles. I'm afraid China is on a historical upswing (after millenias of decay) while Australia is on a downswing after a mere 2 to 300 years upswing.
Hope I'm wrong, by the way, I like Aussies a lot. Like I said, not oo good at this. I already have a hard time firing where a stock will be trading a month out, let alone where a country will stand a decade out.


On Nov 08 09:53 PM Teutonic Knight wrote:

> taojaxx - - -
>
> Perhaps another point of interest that came to my mind is the parallel
> between China/Australia and United States/Canada in the realm of
> industrialization. During the last century of 1900-2000, as America
> ramped up its Industrial Revolution, Canada because of its geographical
> proximity, naturally had become the "Backyard of the United States",
> supplying all sorts of natural resources, - be it timber, paper,
> minerals, oil, natural gas, coal, asbestos, hydro electric power,
> and even fresh water, to name a few.
>
> And during the post-WWII decades of 1950-1970, the United States
> virtually soaked up all Canadian industrial enterprises by setting
> up subsidiaries, branch plants, and assembly plants. For many years
> until of late, this arrangement had worked very well as Canadian
> workers would enjoy almost the same benefits and pay as their American
> counterparts, with the "Loonie" hovering around the 90 cents to the
> US Dollar mark, as if to say Canada is at about 10% discount of its
> US equivalent goods and services in every walk of life.
>
> There is a similarity emerging here with Australia to becoming that
> "Backyard of China". The recent appreciation of the $A and their
> central bank raising interest rate are indicative of such a trend.
>
>
> Just a thought!
>
> TK

Nov 09 05:02 PM