Westpac’s Evans Goes From Zero to Hero With Outlier Australian Rate Call
Traders acting on Evans’s July 15 prediction would have profited amid the market carnage sparked by Europe’s debt crisis and the first U.S. credit-rating downgrade. The yield on the nation’s three-year government bond dropped as low as 3.41 percent from 4.41 percent, handing investors a 23 percent annualized return. The benchmark stock index has tumbled 5.4 percent and Australia’s dollar lost 2.9 percent.
Evans’s call, while yet to be proven right, is gaining a following: Goldman Sachs & Partners Australia Pty and Deutsche Bank AG (DBK) last week switched course to forecast the next Reserve Bank rate move will be down. A recent trip to Europe helped convinced Evans the region’s troubles would slow Australia’s economy, which hasn’t been in a recession for two decades.
“The way we saw it, the global economy would provide the catalyst, but the major reason would be the deterioration in the unemployment rate in Australia,” Evans said in an interview Aug. 12. “It got more attention than most predictions we make, and at the time I didn’t expect that.”
The day he reversed his earlier call that rates were likely to rise, Evans was the outlier in a Bloomberg News survey of 21 economists, with the others forecasting an increase or no change.
The RBA will tomorrow publish minutes of its Aug. 2 meeting, when Governor Glenn Stevens left the overnight cash rate target unchanged at 4.75 percent after considering whether to end an eight-month pause and lift borrowing costs.
On July 26, Stevens said the nation’s subdued household spending will likely rebound as consumers gain confidence. A day later, a report showed inflation surged in the second quarter above the central bank’s target range of 2 percent to 3 percent, increasing speculation of further rate increases.
The RBA on Aug. 5 slashed its 2011 growth projection to 2 percent from 3.25 percent. Traders see a 100 percent chance Stevens will lower the benchmark rate by 75 basis points to 4 percent by November, cash rate futures showed in Sydney at 1:10 p.m.
Former Macquarie Group Ltd. rate strategist Rory Robertson, who now works for Westpac, bolstered his reputation after betting against the market and accurately forecasting the central bank would cut rates in 1996, earning him the nickname “Rate-Cut Rory.” In 2009, JPMorgan Chase & Co. chief economist in Australia Stephen Walters was alone in picking Stevens’s decision to become the first Group of 20 policy maker to boost rates after the height of the global recession.
Evans, who declined to disclose his age, spent two decades at Westpac, the nation’s second-largest lender. Prior to that, the Sydney University and London School of Economics graduate worked as a research manager for the Reserve Bank and held roles at Commonwealth Bank of Australia, the nation’s biggest bank.
“I’m an output gap guy,” Evans said in the interview in Sydney. “If the output gap is widening because the labor market is weakening, then workers can’t get the wage increase they want to compensate for that and you end up with slower growth.”
Evans said he and his team of economists found reasons to change their outlook on Australian rates after he returned last month to Sydney from a tour of London, Frankfurt, Zurich, Paris and Edinburgh, where it became clear to him “how dysfunctional that whole story” of European debt was.
“The biggest test with these sorts of things is how comfortable do you feel telling the story to your customers. And if you don’t feel comfortable, you’ve got to reassess it,” said Evans, who also forecast the jobless rate would rise to as high as 5.75 percent next year.
“Bill is renowned for going overseas on marketing trips and coming back and changing his call,” said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. (ANZ) who expects rates to stay unchanged. “And he obviously made the trip to Europe just before his last change of view which proved to be quite fortuitous. But there’s still a long way to go. The RBA hasn’t cut yet.”
Unemployment jumped in July for the first time since October, to 5.1 percent, according to a report last week. Separate reports since July 31 show consumer confidence deteriorated for a fourth straight month to the lowest level in more than two years and demand for mortgages grew at the slowest annual pace in June since 1977.
The central bank’s next meeting is on Sept. 6. Last week, economists at Goldman Sachs predicted a cut next month, and Deutsche Bank forecast a reduction in October. While Australia & New Zealand Banking Group reduced home loan rates for three-year fixed mortgages to 6.44 percent from 7.04 percent yesterday, Commonwealth Bank of Australia (CBA) Chief Executive Ralph Norris said he doesn’t expect “substantial” reductions by the central bank.
Asked whether he now feels his December call may now be too cautious, Evans replied: “I’m not going to change it.”
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