AMW: RBA forecasts to be revised higher, eyes on Lowe for guidance

Today sees the first RBA Board Meeting of the year.

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  • Since the RBA’s November forecast update, data on the Australian economy has been generally better than both the market and the RBA expected. The unemployment rate has declined to 6.6%, a full six months ahead of the RBA’s upside scenario. We expect forecast upgrades (note the forecast period will be extended to mid-2023) with market focus on the inflation track. Given the improvement seen in the economy, there is the possibility the revised upside scenario has core inflation back within the 2-3% band. This would be important for markets in trying to judge when the RBA is likely to eventually hike cash rates.
  • While NAB still sees a lift in the cash rate as not occurring until at least 2024 due to the inflation outlook, the RBA needs to make a decision on the $100bn QE program which is due to expire by the end of April 2021. We see QE being extended, but tapered to $50bn, bringing cumulative purchases to $150bn. Additionally, the RBA’s 3yr YCC target which is tied towards not lifting rates for three years will also need to be reviewed by mid-2021 given nearly a year has passed since it was first implemented. Some insight into the RBA’s thinking could come on Wednesday with Governor Lowe giving a speech with Q&A and again on Friday in Parliamentary Testimony.

Perth lockdown unlikely to have an enduring impact on markets; vaccine rollout

  • The lockdown in Perth announced on Sunday night for five days is unlikely to have an enduring impact on Australian markets with recent virus outbreaks being able to be quickly controlled, which is our base case (e.g. Adelaide and Brisbane).
  • Australia’s vaccine rollout is due to start in late February with the ambitious target of having the population vaccinated by October. We are watching the vaccine rollout in Israel closely to see how effective vaccination is in stopping transmission and to what extent social distancing requirements can be lifted and border restrictions eased.

The week ahead

  • Australia: RBA the key focal point this week with the Board Meeting on Tuesday, along with a speech by Governor Lowe on Wednesday (on “The Year Ahead”), his Parliamentary Testimony on Friday, and the latest Statement on Monetary Policy (SoMP) with key forecasts also on Friday (see above for details). Datawise there is Weekly Payrolls on Tuesday, Building Approvals on Wednesday, Trade Balance on Thursday and Retail on Friday.
  • International: focus remains on equity valuations given Friday’s losses as well as being another big week for earnings (Alphabet and Amazon report on Tuesday). Datawise: US: has the Manufacturing ISM on Monday, Services ISM on Wednesday and Payrolls on Friday. For Payrolls consensus sits at 50k and for unemployment to be steady at 6.7%. CH: the Caixin Services PMI to garner more focus after the weaker than expected official PMIs on Sunday. UK: the BoE in focus on Thursday where market interest will be on any discussion of negative rates. EZ: Q4 GDP on Tuesday and CPI figures on Wednesday.

Chart 1: Unemployment profile will need to be revised with unemployment running six months ahead of the RBA’s upside scenario

 

Chart 2: Core inflation will also need to be revised

 

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