Australian Markets Weekly

A busy few weeks as we get a good number of timely indicators on the economy as well as the RBA’s latest assessment of developments at tomorrow’s Board meeting. Governor Stevens speaks on Thursday.


RBA and Retail Sales to Soften

The market context adds extra interest, for while market pricing still says the greater likelihood is that the RBA’s cash rate will be unchanged at 2.5% a year from now, “risks” around this view have shifted in recent weeks. As the chart below shows, for the first time in a while markets now price a greater chance the RBA cash rate will be lower than higher.

The markets assessment of risks looks correct to us.

RBA hasn’t locked the door on further cuts

Let’s deal with the RBA Board meeting first. Of course they’ll the leave cash rate at 2½% again so it is changes to their Statement we’re looking for.

Events/data haven’t shifted materially over the past month, but the small shifts we have seen have been in the softer direction: 1) the zing appears to have come out of the interest rate sensitive parts of the economy like house prices (albeit they have improved in recent weeks), consumer confidence, and perhaps retail sales; and 2) the $A has remained high.

What has also changed is the RBA – or at least our perception of them – as while the Statement immediately after the May Board meeting was basically unchanged and seen as neutral, the Minutes from the May Board meeting we got a few weeks back revealed a more uncertain Board.

The Minutes mused that “it was difficult to judge” whether interest rates were supportive enough to offset the known negatives from the “expected substantial decline in mining investment and the effect of planned fiscal consolidation”. They added “Those uncertainties were likely to take some time to resolve”.

This was the first hint that the door was not entirely closed on the need for future rate cuts. They’d very clearly prefer not to cut what they already say is super low cash rate, but they may not be as dogmatically opposed to a cut as we thought.

Overall, while the Statement will be 95% unchanged a few wording tweaks in the accommodative direction seem likely.

Week ahead – Retail Sales fell in May?

Plenty of data ahead, the highlight’s to be Thursday’s retail sales and then next week the June NAB Business Survey and June labour force.

After twelve consecutive monthly increases we expect retail sales fell a sharp 0.5% in May. The main reason to expect a decline is that the key factor that has driven better retail sales over the past year – the “wealth effect” driven by rising asset prices – is now waning with house prices flattening out and consumer confidence now well below the peaks it reached in Dec/Jan. Retail sales can also be driven by household income growth, but the data we have to Q1 tells us this remained weak – weakest wage growth in several decades combining with modest jobs growth. Once you take away the “wealth effect” there is not a strong underpinning for sales.

So fundamentally there are good reasons to expect retail sales to soften in the months/quarters ahead. We don’t known exactly which month the statistician might record it but anecdotes suggest it was probably in May. The Federal Budget in early May probably didn’t help retailers and neither has the warm weather, with a number of retailers talking about poor “winter” clothing sales. We’ve also had a number of profit warnings from listed retailers.

Plenty of other data also. Today we get May Credit data, June house prices tomorrow, May trade balance Wednesday, and May building approvals Thursday. Offshore, China PMI tomorrow and Thursday we have non-farm payrolls, a day earlier than usual ahead of the Independence Day holiday.