For the full picture, download the report: Australian Markets Weekly 20 January 2020. 

Analysis

• Last year Governor Lowe said that QE would be considered if the cash rate reached a floor of 0.25%, while he testified that unconventional policy would be an option if the economy materially underperformed relative to the Reserve Bank’s outlook.
• Calculating confidence intervals around cash rate futures pricing and the Reserve Bank’s economic forecasts, we estimated an average probability of QE through to mid-2021 of about one-third.  This assumed QE would be implemented if: (1) the futures market pointed to a cash rate below the Reserve Bank’s 0.25% floor; or (2) the economy underperformed with growth in the 1s or less, inflation below target and unemployment of 5.5% or more.
• This reasonable risk of QE reflects the fact that forecasting is difficult, where large forecast errors matter given Australia is stuck in a low-interest rate, low-growth, and low-inflation world.  For its part, NAB forecasts the cash rate to reach 0.25% by mid-2020.  NAB sees an increased risk of QE in H2 2020 should unemployment deteriorate more than forecast, given inflation poses no barrier to further easing.

The week ahead – AU labour, NZ CPI, ECB, BoJ and BoC meetings; US earnings

• Local: Following a very strong November print, NAB expects Australian employment rose by a smaller 10k (market: 15k) and unemployment rose to 5.3% (market: 5.2%) in December. Westpac consumer confidence should show the impact of the bushfires on sentiment. In NZ, BNZ expects Friday’s Q4 CPI increased 0.4%, lifting the annual rate of inflation to 1.8% from 1.5% in Q3 – higher than the RBNZ expected in its November MPS, namely 0.2% q/q and 1.6% y/y.
• Global: World leaders gather at the 50th World Economic Forum in Davos where climate change will be a focus.  US earnings season is in focus, with Netflix reporting on Tuesday, the first big US tech stock to report. The policy meetings of the ECB, BoJ and BoC are this week, with all three central banks expected to remain on hold.

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