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Australian Markets Weekly RBA expects slow, bumpy recovery

• The RBA’s latest scenarios for the economy see a slower improvement in unemployment, with the unemployment rate set to peak at around 10% at the end of this year (instead of 9% previously expected) and only fall to 7% by the end of 2022. GDP is expected to contract 6% this year and rise 5% in 2021, with the economy not getting back to pre-COVID levels until 2022.
• Ongoing labour market spare capacity has also seen forecasts for wages growth and inflation downgraded by around 0.25% points across the horizon with trimmed mean inflation not getting back to the RBA’s 2-3% target range in the forecast horizon.
• Importantly, below target inflation occurs in all three RBA forecast scenarios (upside, baseline and downside), suggesting the RBA could do more to get inflation towards target, although fiscal policy is clearly best placed to address the current pandemic shock to the economy. This will be a key question markets will be focusing on when the RBA Governor gives his parliamentary testimony on Friday.
• The RBA’s inflation forecasts are also in sharp contrast to the inflation fears seen amongst some in the market, where breakeven inflation rates and gold prices have risen recently. So far, the impact from COVID-19 has affected demand more than supply even with record government stimulus and very easy monetary policy.

The week ahead

• Australia: A busy week domestically where focus remains on Victorian virus counts which are showing signs of flattening out. Data wise, Australian payrolls are published on Tuesday for the week ended 25 July with job losses from Melbourne’s earlier stage 3 lockdown needing to be weighed against continued reopening elsewhere. The NAB Business survey is also out on Tuesday. The Wage Price Index on Wednesday will be closely watched for early impact on wages, while employment on Thursday is likely to dominate with a wide range of market expectations from -120k to +150k – the key being whether the reference week was too early to pick-up the slowing seen in payrolls to date. RBA Governor Lowe rounds out the week on Friday in parliamentary testimony.
• International: NZ: across the ditch the RBNZ meets on Wednesday where consensus is for no change. CH: activity indicators for July on Friday under focus, particularly retail sales given the recovery seen in the services PMI so far. Also out is aggregate financing figures due anytime in the week. Europe: quiet week with the summer holiday season firmly underway. US: politics to dominate with Democratic Presidential hopeful Biden set to announce his running mate, potentially influential for the odds of a Democratic clean sweep come November (currently 52% according to PredictIt). Discussion over a fiscal package will continue despite Trump’s executive actions, while on the data front the CPI is on Wednesday and Retail Sales is on Friday. US-China trade negotiators are also set to meet on Saturday.

Please see attached for further details.

Charts of the week

RBA forecasts, while Victoria’s virus cases start to stabilise

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