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Keeping a watch on oil and rates

PLEASE, no more good news. It is killing us. The economy is breaking into a gallop, and WA is near the head of the field.

The housing market is holding up. There is more work around, with 124,500 jobs generated nationally in the past five months, and unemployment is falling. Consumer confidence is at its highest levels for two years. Big business is planning a major boost in investment spending. Even the Australian dollar has clambered up to admire the view above US52.50c.

However, this gourmet menu is too rich for some folks. Terminal worriers are concerned about inflation, higher interest rates and a loss of export competitiveness. Foreign fund managers are treating the local stock market like a punching bag. The monsters that lurk in the bill futures market have priced in a rise in cash interest rates from 4.25 per cent to 5 per cent by July, and 5.75 per cent by the end of the year.

There is no doubt that interest rates are headed higher. As I wrote a few weeks ago, that is the natural corollary of an expanding business climate. I am afraid you cannot have the price of money staying at a 30-year low when the good times are rolling.

Embattled Prime Minister John Howard says the economy is going gangbusters, and he has given a public nudge to the Reserve Bank not to snatch the punch bowl away too soon. It would be nice to think Australia could manage to grow at 5 per cent for a while without shaking to bits. We could certainly achieve that, given a half-decent global recovery. The RBA has got things pretty much right for the past year or two and doesn’t need any political advice. The problem is, if Ian Macfarlane taps on the brakes with a sensible one quarter per cent hike soon, some analysts would immediately start fretting about when the other shoe would drop. Better to wait and see if inflationary evidence appears, and then slap it down with a half-point hike. That might prick the Sydney real estate bubble, but would not hurt corporate profits growing at double digits.

The other side of a rising interest rate coin is better returns for retirees on fixed incomes. Floating rate notes including the popular NAB, Suncorp-Metway and Woolworths, would begin to bob up. The yield on 10-year bonds has skipped through 6.4 per cent. Supposedly that is approaching the levels at which equities are threatened. Some traders have been short selling the shares of the big banks for that reason. Call me old fashioned, but I believe a strong economy and more people with jobs is excellent for banks. Money is attracted by higher rates back into deposits that provide funds to lend, and bad debts should drop.

A bigger threat to the market is the dumping of stock by foreign institutions. Late last Friday, half the brokers in Perth were calling the other half to find out why Wesfarmers shares had dropped $1.30 to $29.60 in a matter of minutes. It transpired that investment bank Morgan Stanley had made a $70 million portfolio switch out of leading Australian companies. Wesfarmers was hit, along with CBA and NAB. The proceeds of the sale are said to be earmarked for Asian markets, perceived to be sexier than ours, and likely to bounce higher on the US recovery trampoline. By Monday morning, local investors had bought back the outraged stocks, erasing all the losses. Only time will tell who was right.

The Economist Intelligence Unit recently promoted Australia to 13th place among the 60 countries it ranks by best investment environment. Oh, we also had the fewest strikes last year since records started half a century ago.

If you want something to worry about, try the oil price. OPEC cuts have pushed the cost of a barrel up from $16 to nearly $25 in recent months. More missile rattling in the White House about attacking Iraq would send it shooting higher.

Australian motorists are already booked for a rise in petrol prices. Coupled with extra dollars on mortgage repayments later in the year, that could crimp retail spending – just thought you might like to keep an eye on the flies in the ointment.

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