By Peter Switzer, Switzer Super Report

The path for term deposits will be a good indicator for when it will be time to cut your exposure to the stock market and I suspect that we're now at the bottom of the interest rate cycle. So with TDs, there's only one way they can go and that's up, but the critical questions have to be ? when does it start? And so how do we play them?

Right now, economists I respect such as Westpac's Bill Evans and NABs' Alan Oster have at least one more cut ahead. My ex-student, chief economist at Macquarie, Brian Redican, has had two more in train for a long time and was absolutely on the money when he jumped on the "RBA has to cut fast and deep" bandwagon, which I reckon I rolled out of the stable just before anyone else.

However, I think the cutting is over and, in many ways, I damn well hope it is! We have been living in abnormal times, with interest rates at levels not seen since Elvis was in the army in 1958!

Returning to normality

We have had Aussie consumers save over 10% of their household disposable income and paying off their debts like never before. The national government was desperately unpopular, the budget deficit was out of control and car dealers have been offering a never-before seen 0% interest rate, and business as well as consumer confidence had been languishing in or around negative territory for years.

We have been living in odd, crazy, mad, bad and dangerous times ? let's call it abnormal ? but now we are getting more normal. So, it is expected that interest rats should also approach normality.

Right now, the one-year TD rate is around 3.75%, while the two-year rate is closer to 4%. I suspect we would need to see a term deposit rate of 5% before some shareholders will start thinking it's time to take some profit off the table.

And for that to happen, the cash rate would have to move from its current rate of 2.5% to something like 3.5%, so why and when might that happen?

On why, it's simple ? both the local and global economies are getting better.

The good news

Let's sum up the local good news below:

  • There were 160,793 new dwellings started in the year to June, the highest annual result in two years and up 10.7% on the previous year.
  • The unemployment rate fell from 5.8% to 5.6% in September (from 5.77% to 5.65%).
  • ANZ job ads rose 0.2% in September ? the first rise since February!
  • The NAB Business Confidence Index lifted from 4.1 points to a 42-month high of +12.3 points in September.
  • Tourist arrivals rose by 2.3% in August, with tourist departures down 0.1%. There were a record 712,500 tourists visiting Australia from China in the past year.
  • The Westpac/Melbourne Institute Index of Consumer Confidence fell by 2.3 points (2.1%) to 108.3 in October, after lifting 4.9 points (4.6%) in September.
  • The Performance of Services Index rose from near 5-year lows in September, lifting 8.1 points to 47.1 points. Still, it was the 20th straight month that the index has been below 50, indicating a contraction of the services sector.
  • The official Chinese Purchasing Managers Index for the services sector rose from 53.9 to a six month high of 55.4 in September.
  • The total value of residential and commercial building approvals in August hit 30-month highs and was up 10.1% over the year.
  • The Performance of Manufacturing Index rose by 5.3 points to a 2-year high of 51.7 in September. Any reading above 50 suggests manufacturing is expanding.
  • New home sales rose by 3.4% in August after a 4.7% decline in July.
  • The RP Data ? Rismark Home Value Index of capital city home prices rose by 1.6% in September to record highs. Home prices are up 5.5% on a year ago but prices rose in just three capital cities in September, which hardly smacks of a bubble just yet!
  • Retail trade rose by 0.4% in August, just above market forecasts.

No more cuts

So above there are loads of reasons why the RBA probably won't cut rates again. It smacks of the kind of data you associate with a more normal economy. The Big Bank will probably wait for the US Fed to start tapering, which should push up the greenback and push our dollar down. However, if our dollar keeps spiking higher, then the RBA could try one more cut but it looks like an outside chance, just like that once mooted Cup Day rate cut.

If you want to start playing the TD game, I'd keep it short because you're bound to be rolling into higher rates next year but it won't start really hotting up until 2015.

To conclude with the famous quote from Sir John Templeton: "Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria."

The pessimism phase was 2009-10, when many of you might recall I was optimistic. The scepticism phase was 2011-12 and optimism took root in 2013. This is still looking to convert pessimists to the cause, which should last until 2015. So 2016 should be the euphoric phase and that's when term deposits will start looking damn attractive to lots of currently committed share players.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).

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