Australian Markets Weekly – RBA: growth ahead but far from a uniform outlook

The RBA is under the spotlight this week. 

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For the full details, download the full report: Australian Markets Weekly 6 Aug 2018

 

  • The RBA is under the spotlight this week.  First there is the monthly Board meeting tomorrow, RBA Governor Lowe speaks at Wednesday lunchtime on Demographic Change and Recent Monetary Policy, followed Friday with the release of the Bank’s Statement on Monetary Policy on Friday.
  • Tomorrow’s RBA Board is again “odds on” to leave rates steady again, the cash rate now having been steady for the past two years, the longest stretch of unchanged official rates.  The Board will be briefed on the Bank’s latest outlook for the economy that will be encapsulated in Friday’s quarterly Statement on Monetary Policy.  We delve further into the outlook on page 2.
  • The risks continue to evolve – especially on tariffs – but baseline official forecasts won’t undergo much change.  Needless to say, we’ll be on the lookout particularly for how the RBA sees the risks to growth, risks the outlook has become cloudier.  The global outlook seems less assured while domestic drivers continue to look uneven if positive on balance.
  • It will be interesting to see whether RBA Governor Lowe’s Wednesday speech contains a deep dive into population growth, the participation rate and what all that means for unemployment and wages, all keys to the outlook.
  • The RBA’s May growth and inflation forecasts still look broadly on track, now with the benefit of the March quarter national accounts (stronger), some recent Q2 growth partials (hints of resilience into Q2) and the June quarter CPI (in line to a touch softer). The medium-term RBA outlook, now extended another half year to December 2020, will also likely continue to forecast 3%-plus GDP growth, a gradual reduction in unemployment, and a gradual increase in inflation to just over 2%.
  • Last Friday’s US non-farm payrolls report was very much a goldilocks report on the economy.  The activity side remained solid, with the unemployment rate down a tenth to 3.9% and the broader underemployment rate declining 0.3% points to 7.5%. Growth in average hourly earnings remained steady at 2.7% y/y, pointing to the likelihood of further gradual rate rises from the Fed.  A hike at the 26 September FOMC is over 90% priced in.
  • The AUD/USD remains sensitive to any news on tariffs and trade.  In a data-lightened week offshore, this focus increases even more, especially with little in the way of major US economic data ahead of the July CPI out on Friday.  Wednesday’s Chinese trade report for July could draw more political and market interest should the surplus shrink or expand materially.  (Shrinking export and import growth would likely be viewed as signs of slower Chinese growth.)
  • On Friday, China specified increased tariffs on $60bn of US imports, introduction held over pending US actions.  This might ordinarily have added more selling pressure to the AUD, but the People’s Bank of China increased reserve requirements on Chinese yuan forwards, supporting the CNY (and AUD) Friday.  The USD/CNY has been set a few pips higher today (CNY lower again), the AUD softening below 0.74.

A sticky unemployment rate