Australian Markets Weekly: 6 November 2017

RBA to stick with gradual inflation uplift ahead

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Overview:

  • It was an interesting end to last week, locally with soft September Retail Sales throwing soft wages and uneven consumer spending into the limelight. In the US, a solid print on non-farm payroll employment came with softer average hourly earnings, the still missing element on the path to higher inflation.
  • Soft local retail conditions will very likely get acknowledgement in tomorrow’s RBA Board Statement. In August, the Bank noted consumption as a “source of uncertainty, slow growth in real wages and high household debt likely to constrain spending”. Higher utility and rising petrol prices could now be added to those headwinds.
  • The local data will need to strengthen in coming months for markets to believe that the RBA will lift rates next year. Lower Q3 inflation and now soft retailing makes a hike in the first part of next year much less likely. NAB’s call remains that the Bank will not begin to lift rates until the second half of next year. Lower unemployment will be a key trend to monitor in this regard – signs from the leading indicators suggest unemployment will fall.
  • The RBA’s forecasts for the economy will be a key focus this week, both from the potted summary in tomorrow’s post-RBA statement and in detail in Friday’s Statement on Monetary Policy (SoMP). We expect the RBA to leave rates on hold. We expect the Bank to hold to its broad growth and inflation outlook, while nudging lower its unemployment forecasts.
  • We expect the Bank to stick with its growth outlook of “around 3%”. Good 0.8%/1.8% growth in Q2 will have given the Bank’s real confidence its 2½% Dec 17 forecast is on track. (In Q3, there’s a strong base effect as a 0.4% contraction in Q3 16 drops out, which is likely to see annual growth closer to if not above 3%, a print we expect will give the market confidence a rate hike is in play for later next year.
  • Note that Friday’s SoMP will dispense with forecast ranges, moving to point estimates for the key forecast variables.
  • RBA forecasts for unemployment will likely be recast somewhat lower. Rather than 5-6%, the implied (mid-point of the forecast range) could be lowered by ¼% with a plausible “4” handle within sight.
  • On inflation, the RBA’s Dec 17 implied underlying CPI forecast will likely to be held at 2%. The Bank is also likely to hold to its 2018 and beyond inflation forecasts (2% in 2018 then higher) given the growth/ unemployment outlook (and thus steady then higher wages), higher oil prices and a lower $A offsetting a residual bad taste from the low Q3 print.

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