Australian Markets Weekly – Funding pressures, BBSW/Y and monetary policy

Today’s Weekly considers the implications of the recent increases in Australian money market rates for the RBA/monetary policy.

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For the full details, download the full report: Australian Markets Weekly 2 July 2018

  • In today’s weekly we consider the implications of the recent increases in Australian money market rates for the RBA/monetary policy. We conclude that before the RBA considered lowering interest rates to offset this phenomenon, first the rise in money market rates would need to be seen as persistent and would need to lead to a significant rise in broader lending rates across all borrowers. Only the latter would likely impact the RBA’s forecasts for growth and inflation.
  • The Bank would likely also consider whether there were any changes to its market operations that might be implemented to assist in any persistent change in how money markets are functioning, though we suspect that for now, the RBA believes the situation in time will right itself.
  • This week starts with a higher AUD, on the back of the emergence of Friday’s agreement on migration by EU leaders after a marathon negotiation. It’s an important victory for Chancellor Merkel – the deal is expected to appeal to both sides of the rift in her coalition government – and markets will watch how Merkel holds together her government in the week ahead.
  • For the week ahead, trade tensions continue to dominate market sentiment globally, with the 25% US tariffs on $34bn of Chinese goods set to begin on Friday. Markets will also be watching emerging markets (EM), which have been rocked by trade war fears, a stronger USD and higher US yields.
  • US ISM data, for Manufacturing on Monday and Non-manufacturing on Thursday, will be analyzed for any trade-related negative spillovers. Markets are not expecting a significant impact, but recent Fed anecdotes indicate growing concerns among businesses, which are considering deferring spending and investment.
  • Brexit talks will also be a focus this week, as PM May summons her cabinet for a meeting on 6 July ahead of a key Brexit white paper scheduled for Monday 9 July. There is an increased urgency to Brexit discussions given the March 2019 deadline is coming closer and the Pound has fallen sharply in recent weeks.
  • Domestically, the RBA meets on Tuesday, and May data is released for: Building Approvals (Tuesday), Retail Sales and Trade (both Wednesday). The RBA’s post-meeting Statement is likely to reiterate that the Bank is happy to wait for wages and inflation to pick up, while it is also worried about trade tensions.
  • Data wise, Retail Sales on Wednesday and Building Approvals on Tuesday are the focus. We expect Retail Sales to be soft, with NAB’s Cashless Retail Sales Index indicating no change in ABS Retail Sales in May. Tomorrow’s Building Approvals will also be monitored for any signs apartment approvals are softening further.

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