For the full picture, download the report – Australian Markets Weekly 11 June 2019.

With the RBA embarking on a new easing cycle, Governor Lowe has said that reducing unemployment to the bank’s 4.5% estimate of the NAIRU should return inflation to the 2-3% target band. At the same time, Lowe repeated his call for government support in achieving this goal, via fiscal stimulus (including spending on infrastructure) and structural policies.

·      Given interest rates are already at very low levels, government intervention would be helpful, particularly measures aimed at boosting Australia’s dismal labour productivity, which is growing at the slowest trend rate in decades. Labour productivity has been restrained by: (1) recession-like growth in the capital stock, which is the product of years of underinvestment by companies; (2) slow growth in the world technological frontier; and (3) an absence of lasting reforms over the past two decades.

·      Weighing up these options, we think any government rethink on fiscal policy will feature infrastructure spending given the appetite for reform seems low. The downside to infrastructure spending is the lags involved, where the experience of spending on schools during the global financial crisis shows that even the most “shovel-ready” projects can take time to have an effect, such that the burden of delivering timely stimulus is still likely to be borne by the Reserve Bank cutting interest rates.

The week ahead – Temporary election workers boost May employment

·      Thursday’s labour market data are key for financial markets given the RBA’s repeated emphasis on the importance of the unemployment rate for near-term policy. NAB is forecasting a strong report given the employment boost from temporary workers hired to run the federal election. We expect employment grew by 40k in May and the unemployment rate ticked down to 5.1%. If we are wrong and unemployment increases again, then the market would price in more risk of a July rate cut. RBA Assistant Governor (Economic) Ellis is speaking on “Watching the Invisibles” and we expect she’ll discuss the theoretical policy concepts of the NAIRU and the neutral interest rate, suggesting that both have fallen over recent years.

Updated FX forecasts – Revising our AUD forecasts

·      Our FX Strategy team has made some modest adjustments to our AUD forecasts given that an early resolution of the US-China trade dispute looks unlikely. The AUD/USD is now forecast to be 0.73 at end-2019, down from 0.75 previously. Support for a firmer AUD is still seen coming from both a weaker USD trend that now looks to be under way, and key Australian export prices, assuming China pulls policy levers (other than the currency) to keep growth on an even keel in the absence of an early de-escalation in trade tensions. There are also some modest adjustments to our AUD cross-rate forecasts, as detailed on page 6.

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