The Reserve Bank's campaign to push up rates to kill inflationary expectations seems to have worked (subject to the impact of oil prices). As the National Australia Bank said Tuesday, business confidence is also low and probably if measured today, would be down where consumer confidence is at the moment after the last week of rising rates and stockmarket turmoil.
Investors responded to the Fed's prompting like they were supposed to, chasing shares they had previously sold off, avoided or bad-mouthed. Here, all those fears of market innuendo and the terrible 'shorts' disappeared out the window, There's nothing as forgiving as a sharp rise in share prices or a boom. But a boom it isn't.
That was borne out Wednesday night in the US when the rally ran out of steram and shares sagged as the dollar plunged past 1.55 to the euro and yields on US Government securities fell sharply. Relief rally, sucker rally or dead cat bounce. It's all of those, but not a sustainable rebound because the underlying economic problems in the US and parts of Europe are too far gone at the moment. No mention of stopping the US economy from sliding into recession: that's a forgone conclusion. Millions of people have lost their homes, jobs and billions of dollars. Others still owning their homes have watched the value of their houses plunge: a process that will go on for much of this year.
And it's why the big rally on markets around the world had the hallmarks of a one-off yesterday. The real story remains US house prices and the continuing implosion of the housing sector. The Fed and other central banks have drawn a line in the sand and promised to defend the liquidity and good names of the credit system: the one thing that would plunge the world into a sharp recession if it is locked up.
There's a real chance of that happening, or hopefully, there was until the Fed opened the taps for the second time in five days. Next week sees some very big investment banks report quarterly earnings and there was a growing horror at what a bad report or a succession of losses and poor outlooks could do to confidence levels in the heart of the financial system.
The Roy Morgan Consumer Confidence Rating for March fell 6.3 points to 109.5, from February and is 11.2 points below the March 2007 result of 120.7. The Roy Morgan group said the latest result is the lowest since September 2006. The Westpac/Melbourne Institute consumer sentiment index fell for a third month, falling 9.1 points in March from February to 88.6. A reading below 100 shows pessimists outnumber optimists. Including the falls in January and February, the index has slid 21 points, the largest fall since the survey started in 1975 and an indication of the dramatic transformation in consumer expectations and outlook that has gone on in the first 10 weeks of 2008.
Economists from Goldman Sachs JBWere repeated their views of last week today in saying that 7.25% was the peak of the current interest rate cycle and that the next move would be down.
"We continue to believe that the RBA has finished tightening policy. Despite resilient demand for housing finance at the turn of the year, the weight of (more timely) evidence suggests we have passed the peak in the growth cycle. Alongside early signs of this weaker domestic data flow (retail sales, building approvals, sentiment), the RBA will be wary of tightening into a clear negative shift in the global risk profile - as a US recession appears more likely and a rare pessimism plagues markets."
The NAB said the same yesterday and added that the RBA would be in a 'significant' cutting mode for rates in 2009. The confidence index fell to the lowest since September 1993. The survey was conducted between March 3 and March 9.
The survey showed that the confidence of people who have a home loan slumped 12.1% in the month to be down 31.5% from March 2007; indexes measuring the outlook for economic conditions over the next 12 months, and for the next five years, both fell 5.6%; consumers' outlook for family finances over the next year fell 8% and like the Roy Morgan poll, the index of whether now is a good time to buy a major household item plunged 11.4%.
