Below trend growth to continue
We preview this week’s Federal Open Market Committee meeting and look to tomorrow’s RBA March Board Minutes. The focus will be on the Committee’s forward guidance and forecasts, and whether they can still be “patient” before beginning to normalise the stance of monetary policy.
In this Australian Markets Weekly we preview this week’s Federal Open Market Committee meeting that concludes on Wednesday (Thursday morning Australian time) as well as look ahead to tomorrow’s RBA March Board Minutes. RBA Governor Stevens is speaking Friday to an American Chamber of Commerce lunch, creating more market interest this week. There is no title for that speech as yet.
The market is besotted how the FOMC will mould its words and guide the market on rate lift off, currently priced for later this year. Lift-off is not expected at this meeting, but the focus will be on the Committee’s forward guidance, especially around how they might amend the following excerpt from their 28 January Press Release, the last time the FOMC met:
“ …the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.”
The market attention on the FOMC words will be intense, especially whether “patient” will be cut. With the US unemployment rate down to 5.5% in February, it’s logical to infer the Fed will think they’ve made further progress toward their employment objective. The US under-employment rate has also been coming down, but at 11% in February, remains some two percentage points above its long term average. Moreover, inflation remains doggedly low. Average hourly earnings have continued to grow at moderate rates with US consumer inflation also well below the FOMC’s 2 percent inflation objective. The core PCE deflator rose by 1.3% over the year to January, with some signs that consumer inflation in recent months has been decelerating. The FOMC still has time on its side. Progress has been made toward their employment objective and with no inflation alarm bells ringing.
With that in mind, the FOMC will, we think, acknowledge such labour market progress, but still without locking themselves into the market interpreting that the next one or two meetings (30 April, 18 June) are definitely “live” for lift-off. This will require some deft moulding of the words in the Press Release that can be emphasised or interpreted at Dr Yellen’s Press Conference when she will field questions from the press.
It’s conceivable that while the word patient could be excised from the statement, Dr Yellen will be emphasising that the FOMC still has some time on their side, that they are not yet ready to signal imminent lift-off and of course the importance of watching the data closely. On that front, the US data surprise index (a daily measure of whether data flows are exceeding or under-clubbing consensus forecasts) has been at its lowest level for three years at a time when the US$ has continued strengthening, further factors suggesting the Fed can remain patient in essence if not in word.
We will be paying close attention to the Fed’s revised forecasts for growth, unemployment and inflation. In their last set of forecasts released with the December 2014 meeting, their “central tendency” of core PCE inflation was expected to be 1.5-1.8% by the end of this year and 1.7-2.0% by the end of next year. Some further shaving of this forecast would not surprise us. (It was also shaved lower in December.) The headline PCE deflator forecasts will also be lowered, if only from the impact from lower oil prices, and, we note that WTI oil this morning is now back down to within sight of its January lows.
Tomorrow’s RBA Minutes will be examined for any clues on the influence of factors that led the RBA to refrain from easing monetary policy again in March, especially housing.
This past weekend’s CoreLogic RP Data house prices data are still rising at a heady clip in Sydney and again accelerating in Melbourne. Sydney prices rose 1.1% this past week to be up 4.4% so far this year, while Melbourne prices rose 0.5% bringing the year to date rise to 3.6%. Other capital city prices remain benign. Official anxiety over housing is only being exacerbated right now.
Last week’s labour force report for February did not add too much to the debate with steady trend unemployment at 6.3%, and with employment growth resuming. We did note however that the Statistician’s estimated growth in the civilian working-age population has lessened somewhat to below annual growth of 1.7% from 1.8% as recently as March last year. Annualised rates of employment growth over the past six months were running at a rate of 1.4%, suggesting not much further upward on the unemployment rate.
Continued strength in house prices, an OK labour market, signs of further growth in retailing through January are not adding to the case for the RBA to ease monetary policy again in April. The other major element in prospective growth, confidence was a little lower this month, though levels are not far from longer term averages. Also, the Australian dollar is less of a constraint on Australia’s growth and competitiveness.
If the RBA was looking for signals to ease again, then such recent developments would suggest that the Board can continue to be patient in not easing again in April, even though there is always the potential for surprise. The market this morning is pricing in a 37% chance of the RBA easing again in April. An easing is fully priced by the June RBA Board meeting with yet another almost fully priced by late 2015/early 2016.
As well as the RBA Minutes, RBA Governor Glenn Stevens is speaking on Friday and this will be a further opportunity for the Governor to speak (and/or answer questions) on the economic and policy outlook, if he so wishes of course.
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