THE BIG PICTURE: One more cut with feeling for the RBA

So do the revised figures on the federal budget make a rate cut more likely or less likely on Melbourne Cup Day?

Analysts have differing views. Some say that the changes announced in the mid-year update were largely accounting tricks. Others say that the determination to produce a surplus, no matter what, means that the Reserve Bank has to keep downward pressure on the economy.

Can they both be right? Well, to a point. Certainly there was a fair degree of tinkering to keep the surplus goal on track. But the fact that the goal is still there despite slippage on economic growth and employment projections and reduced mining tax revenue means that fiscal policy is well and truly contractionary.

If the government achieves its objective, it will be the biggest one-year improvement in the budget in 50 years. It also has to be remembered that rate cuts aren’t having the usual impact on the economy as people remain cautious about spending and investing. And the Aussie dollar is modestly overvalued. So a rate cut on November 6 is still regarded as a good bet, and the Reserve Bank needs to keep its easing bias solidly in pace.

With the US and Chinese economies recovering, hopefully the Reserve Bank won’t need to cut rates further in 2013.

The week ahead

The domestic economic calendar is still largely devoid of what could be called “top shelf” economic indicators. But data on business inflation (producer prices) is released over the week together with building approvals and a gauge on manufacturing activity. In the US, the highlight is the latest jobs report, mere days ahead of the presidential election. And a gauge on the health of the US manufacturing sector is also issued.

In Australia, the week kicks off on Monday with the Australian Health Survey, a report that is likely to attract significant media coverage and will throw the investment spotlight on listed health care operators.

Also on Monday, September data on new home sales is released. Some recovery is likely after August sales slumped by 5.3% to the second lowest level in 15 years. In coming months state government grants for purchases of new homes should lead to higher sales.

On Tuesday the second release of data from the 2011 census is conducted, covering the status of Australians in the job market. There is a lot of debate about the ‘true’ level of unemployment and the data should serve to clear up some of the uncertainty.

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