Tuesday, August 16, 2011

DIX Index in overdrive

The DIX Index, which measures the standard deviation of interest rate forecasts amongst the tipsters we follow, has risen above 2 for only the second time.

imageThe last time was in October 2008 when it reached a stellar 2.6.  That month saw the second (of what would ultimately be 5) RBA cut, with the cash rate reaching 6%, down from its cyclical high-point of 7.25%.  Forecasts for the cash rate setting as at December ‘08 ranged from a steady 6% to a dramatic fall to 4.5%.  Of course the reality was that rates in December went even lower, to 4.25%.  The forecasts for March, June and September ‘09 reflected the same story, with forecasts ranging from a flat 6% (in one case, a hike to 7%) to further cuts to 4%.  The reality was that rates fell to 3.25% by March 2009, and to 3% by June.

Which was the forecaster that came so much closer to reality than the rest of them?  It was the cash rate forecasts implicit in bill futures pricing.  And guess what the situation is today, with one forecaster tipping that rates will plunge to a recession-evoking 3.25%, while the rest (bar one or two) are essentially calling for rate hikes?  Yes, its the bill futures again, although it’s significant that one of the better tipsters over a long period of time has been Bill Evans of Westpac, and he broke ranks some weeks ago with an aggressive call for four rate cuts over the next year.  None of the economists we track has followed him, although ANZ has canned its previous forecast of one or two rate hikes in favour of a flat forecast.

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