Australian Markets Weekly: 11 September 2017

What does the Bank of Canada mean for the RBA?

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Overview:

  • In light of the Bank of Canada’s move to further raise interest rates last week, this week we contrast the performance of various economic indicators in Canada and Australia, to see if the Bank of Canada’s move has any implications for the RBA.
  • We find that economic performance in Canada has been considerably stronger than in Australia over the past 9-12 months, with strength in Canadian GDP, retail sales and consumer confidence. This has seen the Canadian unemployment rate drop nearly one percentage point since October to near pre-GFC lows.
  • That said, the Bank of Canada’s move was also driven in part by the desire to remove some of the stimulatory policy setting currently in place in Canada.
    Such a stimulatory setting is also in place in Australia and in the broadest sense, the global monetary policy cycle is turning, with the Fed and BoC raising rates, and ECB beginning to talk about tapering its QE program.
  • It is our expectation that the RBA would also begin to remove accommodation before Australian inflation is back at the midpoint of the inflation target and before all the spare capacity in the labour market has been reduced.
  • Last week’s Australian GDP data showed a welcome rebound in Q2, although concerns remained about government spending supporting growth and the weakness in average compensation per employee (COE) – a wages measure.
    As our chart of the week shows (as did our consumer confidence analysis last week), many Australian indicators have been restrained by weakness in mining related areas. CoE similarly has been restrained by the mining regions of QLD,
    WA and SA. Monitoring for a rebound in these regions and for a decline in unemployment and underemployment more broadly, will be important for timing when the RBA will begin to reduce accommodation in Australia.
  • Employment for August is the main data for Australian markets this week.
    NAB (and the consensus) looks for another solid report with a steady unemployment rate of 5.6% and around 20,000 new jobs created. This month’s release also includes the latest quarterly reading on underemployment.
    Tuesday’s NAB Business Survey for August will also be under focus as will Wednesday’s Consumer Confidence given the recent unusual divergence in the two measures. Deputy Governor Guy Debelle also speaks Thursday at a legal workshop, the market interested in whether he comments on the economy, monetary policy, or the $A.
  • Offshore, US inflation will be in focus with Thursday’s August CPI providing another plot revealing whether low US inflation has continued. China releases August industrial production and retail sales on Thursday.

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