Interest rates change, anyone? Yesterday’s post-meeting statement by Reserve Bank governor Glenn Stevens sent our pet shop galahs (owner, P. Keating) back to their perches — not for the expected lack of action on interest rates, but for the statement’s intriguing mix of a softer easing bias, and a harder sit-and-hold stance. Now the birds will have to “chill” out and have a think about their many 2015 calls of further rate cuts (although there was one galah squawking about the timing of a rate hike yesterday). After bagging the economy as weak, sluggish and sagging for all of 2015, many of the birds would have been somewhat surprised to see the upgraded view at the RBA about the health of the domestic economy:
“In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued. Surveys of business conditions moved to above average levels, employment growth picked up and the unemployment rate declined in the second half of the year, even though measured GDP growth was below average. The pace of lending to businesses also picked up.”
That is a significant improvement from the comments in Stevens’ post-meeting statement for December. So the guv’s admonition to us to “chill” over the end-of-year break and wait for more data, is now easier to understand. The obvious improvement in the final half of 2015 was becoming clearer at the end of the year, and it has taken is more data for November and December (jobs) to produce the upgrade in the RBA’s view. But in that holiday break, January also brought a wave of rising instability, jittery investors and that sinking oil price, which got the governor worrying about the possible impact of this higher “turbulence” on the local economy, leading him to make clear the RBA had room to cut further rates to support demand and jobs in the coming months, if that was needed. This complicates matters for the galahs because the RBA view of the health of the local economy is more upbeat than their’s and it’s boring (and gets little publicity) if you keep forecasting “rates on hold”. The guv fronts the House of Representatives Economics Committee a week this Friday. — Glenn Dyer
Oil prices go south, again. The US$30 a barrel mark is proving to be irresistible to markets and after several days of romantically dreaming up talk of production cuts within and without OPEC, the urgers ran out of wriggle room and down went oil prices overnight by 4% to 5% (and briefly under US$30 a barrel again). At the same time, the latest quarterly reports from giants, BP and ExxonMobil didn’t make for good reading. BP reported big losses for the year and quarter, Exxon a sharp fall in earnings for the year and quarter, and both reported big cuts in planned spending this year. BP also revealed plans to chop another 7000 jobs in the next two years. Both borrowed heavily in the year, partly to pay for their unchanged dividends.
Chevron had to borrow to pay an unchanged dividend, and analysts are watching Shell to see what it does; it has already been downgraded, and faces another cut if it doesn’t cut its dividend. This morning, Standard & Poor’s cut Chevron’s rating to AA minus from AA, and S&P warned that Exxon could be next. Exxon is just one of three US companies with a triple A credit rating, but for how long, after S&P put the company on a negative credit watch, meaning a rating cut could come within the next 18 months. The other two with triple A ratings are Microsoft and Johnson & Johnson. — Glenn Dyer
Warren likes oil. One person who is not scared off by the disarray in oil and other commodities is Warren Buffett. In fact he has a real taste for oil — specifically the refining of it by US group Phillips 66, which has re-emerged as the Sage’s new favourite stock. According to a filing with US regulators late last week, Wozza has lifted Berkshire Hathaway’s stake in Phillips from 10% last August to 13.6% as at the end of January. In fact Wozza spent the best part of US$825 million last month on shares in the big oil-refining group. Phillips joined the lengthening queue of weak results from the energy sector late last week with news of a 43% drop in December-quarter earnings, and a 38% drop in revenue. The lower profit, however, included big write-downs. Phillips is not weak; it bought back US$1.5 billion worth of shares last year (which, with Wozza’s aggressive buying, helped support the share price to the point where it is up 10% over the past year). Being an oil refiner and distributor of products such as petrol, Phillips and its refining rivals make money when crude oil prices plunge. Caltex is a prime example in Australia where its refiner margins have risen, not fallen as crude prices have sunk in the past 18 months. — Glenn Dyer