RBA communications dominated financial markets in Australia over the past week. Aside from its decision to leave policy unchanged at the November Board meeting, the central bank released its quarterly Statement of Monetary Policy (SoMP) and Governor Stevens and Deputy Governor Lowe delivered speeches.
Mr Glenn Stevens gave the clearest indication that the RBA has adopted an easing bias, flagging that 'were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening.'
And for good reason. In the SoMP, the RBA re-iterated that the inflation outlook poses no obstacle to further stimulus, following the lower than expected 3Q CPI print, and that the +6% unemployment rate and record low growth in private sector wages confirms that there remains spare capacity in the labour market. Further, the RBA lowered its outlook for GDP growth and inflation (again) and continues to acknowledge that the economy is expected to operate with a degree of spare capacity for a while.
Against this backdrop, Evidente remains puzzled why the RBA chose not to deliver more stimulus in November to address the shortfall in aggregate demand. Particularly at a time when the RBA has revised down its real GDP growth forecast for CY2016 to 2.5% from 3.25% in the past year. Over the coming months, I believe that there will be a growing chorus for the central bank to cut official interest rates again, irrespective of whether the US Federal Reserve engages in lift off.
Macro-prudential policies and a steep learning curve
Mr Philip Lowe drew attention to problems associated with implementing APRA's macro-prudential measures, designed to curb growth in mortgage lending to investors below 10% pa. The RBA has identified large upward revisions to investor loans over the past six months, and yet in recent months, a sharp fall in investor lending has been offset by a sharp rise in lending to owner-occupiers.
Mr Lowe suggested that lenders' internal systems have not been up to the task of reporting accurate data on the split between investor and owner-occupier loans. It is reasonable to think that investors are also gaming the system and reporting to banks that they are owner-occupiers to benefit from lower mortgage rates. The RBA and APRA clearly remain on a steep learning curve in using macro-prudential policies.
More equity does not equate to a higher cost structure
Mr Stevens echoed recent comments by head of APRA, in suggesting that the effect of recent supervisory measures (notably the lift in capital requirements) would have the effect of lowering expected future bank stock returns. Evidente has previously suggested that a lift in the share of loss absorbing capital in banks' liability mix would have the effect of lowering their expected cost of equity, consistent with the Miller-Modigliani proposition that capital structure is irrelevant for firm value. A lower expected cost of equity commensurate with a lower risk profile should be viewed as a welcome development, not a lift in a bank's cost structure.
Who is afraid of the robots?
A number of widely cited journal papers in recent years have predicted that the emergence of robots and ongoing automation will render obsolete a large number of occupations, leading to concerns of mass unemployment.
But these concerns are overblown. Mr Stevens suggested that few can predict where future jobs will come from, and cited the unanticipated growth in employment in computer system design in recent decades, as well as the more recent growth in employment associated with cloud computing services, social media and environmental sustainability services.
How we spend our leisure time is also likely to give rise to occupations that are unimaginable today. At the turn of 20th century, few could have predicted the rise of tourism related employment, vets or gardeners, simply because the little leisure time we enjoyed at the time, was not devoted to doting on our pets or travelling on holiday. Futurists who have an eye on history, should therefore have little to be afraid of in terms of the employment consequences of the rise of the robots.
Domino's Pizza - The risk of strong growth in a low growth environment
DMP finished up 1.3% on the week against a 0.5% decline in the broader ASX200 index. At its AGM, the company lifted guidance for same store sales to 10% for Australia & New Zealand and 7% for Europe, while new store openings were upgraded to around 270.
The company has defied market expectations for a while now, with sell-side analysts upgrading their forecast EPS for the stock by a compound annual rate of 25% over the past seven years. This has occurred at a time when the broader universe of ASX200 companies have experienced a growth stall (see chart). In a forthcoming report, Evidente will provide more detailed analysis around the stock's growth prospects and draw attention to a growing risk that the few stocks offering strong growth are becoming over-priced in low growth environment.