July 10, 2018
Australian Markets Weekly – Hurdle to RBA cutting is very high.
In today’s weekly we consider the case for the RBA cutting the cash rate.
- The RBA has left the cash rate unchanged at 1.5% for 23 months – a record in the modern era. When asked, the RBA tend to say that their next move in interest rates is likely to be up, but not for some time.
- The market is less sure. Cash is priced dead flat at 1.5% in 2018 and little is now priced for hikes in 2019. There is also some chatter that rising trade tensions, pressure on bank funding costs, and a tightening in credit conditions means the next RBA move could be a cut. It’s conceivable the market moves to price some chance of an RBA cut – as has happened in NZ, where the RBNZ have indicated their next move could be a cut or a hike.
- The RBA’s elevated concern about high household debt (Governor Lowe said it is the #1 domestic risk to the Australian economy) makes the hurdle to cut rates very high. Especially while they are still forecasting the unemployment rate to decline and inflation to rise. Of course, if progress towards its inflation and unemployment goals stalls, or reverses, the RBA can cut again.
- NAB still sees the next move in the RBA cash rate as higher – albeit we think it’s a long way off. The next key data will be Q2 CPI on 25 July and Wages on 15 August.
- Starting off this week, the AUD is a little higher, on the back of US payrolls data that saw the unemployment rate lift 0.2 ppt to 4% and the return of some stability in CNY and EM FX (of which the AUD has become a proxy). However, headwinds remain from softening commodity prices, and the AUD is still susceptible to any escalations in US-China trade tensions.
- Those trade tensions will continue to dominate global sentiment as markets remain alert to any shifts in stance from the US or China, and whether this develops into a tit-for-tat trade war that would be global growth negative. Nevertheless, the BoC is expected to lift rates at its meeting on Wednesday.
- Across the pond from the US, Brexit plans take centre stage – a White Paper is due later today, which will form the basis for EU-UK negotiations on Brexit. Over the weekend, PM Theresa May outlined a “soft Brexit” plan that appears to have been accepted by the “hard Brexiteers”, whereby the UK stays in the single market and some sort of customs union (for goods and agriculture). However, May does not commit to the free movement of people for these sectors, which leaves the door open for the EU to reject the proposal.
- Domestically, two key data releases worth watching: the June NAB Business Survey (Tuesday) and May Home Loans data (Wednesday). The June NAB Business Survey will be the first read since US-China trade tensions escalated, and markets will see how (and if) business sentiment was impacted. Home Loans data will be watched for signs of tightening credit conditions, which some fear will materially impact the housing market. The market is expecting a decline of 2% m/m, while NAB expects a smaller 1.1% m/m decline.
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