For the full details, download the full report: Australian Markets Weekly 4 February 2019

• It’s a big week for local rate and currency markets with three big RBA events – the first communications since December last year. First we have the February Board meeting, tomorrow; Governor Lowe speaks at lunchtime on Wednesday and the February Statement on Monetary Policy is published on Friday. The Hayne Royal Commission Recommendations are also expected to be released at 4.10pm this afternoon.
• The Bank’s growth forecasts will need to be trimmed (due to the weak Q3 outcome and revisions to history). At the same time, unemployment is falling more quickly than previously forecast, while the inflation rate remains low and relatively stable – and not showing much sign of quicker progress back toward the target band.
• At the same time, it seems likely that the various communications will be interpreted as more dovish by markets, as risks around the RBA forecasts have risen over the two months since the early December Board meeting. These increased global risks saw the Fed adopt a more patient and symmetric outlook for policy last week.
• For us, the changes to the RBA’s forecasts and risks surrounding those changes have not been particularly large. This should allow the RBA to await greater information, while sounding less confident that the next move in rates is more likely to be up.
• The questions we are asking ourselves are about whether the outlook means progress on the inflation front will now be considered too slow and whether the economy could afford to grow a bit more quickly? These are more open questions than seemed to be the case only a few months ago and justify the market pricing the risk that any move in rates in the near term, is more likely to be a cut.
• On the local data front this week, the central focus will be the consumer with the release of Retail Sales for December in the wake of reportedly weak trading over Christmas and New Year. We look for a weaker-than-market 0.3% fall in December sales, compared to the market’s flat forecast. This release also comes with December quarter volumes, a key component of consumer spending and GDP. NAB is looking for 0.5% q/q real growth after just 0.2% in Q3. NAB’s model forecast for Household Consumption and GDP is 0.5%. International trade for December is also out tomorrow, with an improved trade surplus likely due to largely to reduced aircraft imports.
• Offshore, NZ has its Q4 labour market report out on Thursday with unemployment tipped to back up slightly to 4.1% from a very low 3.9% in Q3. There are various Fed speakers scheduled this week, including Chair Powell, while China has its Lunar New Year holidays. President Trump is expected to deliver his State of the Union address, Tuesday, US time.

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