Australian Markets Weekly: 30 January 2017

While we are receiving many questions about the impact of President Trump’s policies on the outlook for the US and global economies and markets, the most frequent question we are being asked about Australia is “why is NAB forecasting two interest rate cuts in 2017” (in May and August)?

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Why is NAB forecasting two rate cuts?

  • Low Q4 Australian CPI sees the market reduce probability of a rate hike over the next twelve months.
  • Recent renewed focus of RBA on financial stability considerations suggests deteriorating labour market outlook will be required to prompt further easing.
  • NAB continues to forecast two rate cuts in 2017. This view reflects the expectation that GDP growth will slow in 2018 as housing construction slows, resource exports are no longer expanding and the benefit of the earlier large AUD depreciation starts to wane.
  • Without further stimulus, this slow growth outlook should likely see the unemployment rate begin to rise, something that is seen as inconsistent with the RBA’s charter given inflation is likely to continue to run below target for an extended period.
  • Applications per job ad suggest Australian unemployment rate to track sideways in the months ahead.
  • Key Australian events this week are NAB Business Survey (Tuesday), Building Approvals (Thursday) – which will provide an update on the housing cycle, which is important for our rate view – and what’s likely to be a bumper Trade Surplus (also on Thursday). The latter could be important for S&P as it is part of the AAA rating decision.

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