RBA signals easing bias, but in no hurry

Chris Scicluna
Emily Nicol

After Trump’s latest protectionist moves – with his announcement early yesterday of increased tariffs on iron and steel from Brazil and Argentina followed later by proposals for new tariffs of up to 100% on a range of products imported from France – most Asian equity markets have followed Wall Street lower today. By and large, however, the moves were not quite so marked as in the US, e.g. with the Topix closing down just shy of 0.5% and Korea’s KOSPI down a little less than that. Indeed, China’s stocks bucked the trend with the CSI300 rising 0.4%. In contrast, Aussie stocks were the worst hit, with concerns about renewed trade wars combining with a strengthening of the AUD to a three-week high following a slightly less dovish statement from the RBA (see below).

With the RBA’s commentary triggering a reappraisal of the outlook for Aussie rates, ACGBs sold off, with 2Y yields up almost 8bps to 0.78% and 10Y yields 10bps higher at 1.19%. Following the weakest 10Y auction since just before the introduction of its Yield Curve Control framework in 2016, JGBs sold off too, with 10Y yields up more than 2bps to above -0.04%. So, against that backdrop, despite the negative tone to equities, USTs moved lower too, although 10Y yields are currently up only a little more than 1bp at 1.83%. And having leapt yesterday, euro govvie yields have opened higher again too.

The conclusion of the RBA’s latest policy meeting brought no surprise in terms of the actual policy decision, with the cash rate left unchanged at a record low 0.75%. And as was also widely expected, the RBA reiterated that it remained prepared to ease policy further if required, noting that it would continue to monitor developments, including in the labour market. But while the RBA continued to assess that the risks are still tilted to the downside, it also acknowledged that these have lessened recently. And with the economy assessed to have reached a gentle turning point, the RBA also stated that low interest rates, tax cuts and the improvement in house prices are likely to provide a boost to growth going forward. Against this backdrop, the RBA also emphasised the ‘long and variable lags in the transmission of monetary policy’, suggesting that, despite its easing bias, it is certainly in no hurry to adjust policy.

This notwithstanding, GDP growth seems likely to fall short of the RBA’s expectations over the coming year (it forecasts growth to rise to almost 3%Y/Y by end-2020). And outside of the housing market, price pressures are likely to remain subdued, not least as spare capacity in the labour market will persist. So, inflation seems highly likely to continue to fall short of the RBA’s 2-3% target over the forecast horizon. As such, we continue to expect the RBA to cut rates further, possibly with the next 25bps cut to coincide with the RBA’s updated economic forecasts in February (market pricing suggests that a rate cut at that meeting is now roughly 50:50).

Turning to the data, ahead of tomorrow’s Q3 GDP report, today brought various ABS releases that feed into the national accounts. In particular, the balance of payments figures reported the second successive current account surplus for the first time in 46 years, and the largest monthly trade surplus on record thanks to stronger commodity shipments while imports remained steady. This suggested that net exports provided a third consecutive positive contribution to GDP growth in Q3, with a boost of 0.2ppt. Meanwhile the latest government finance statistics implied that public current spending boosted GDP growth by 0.2ppt in Q3, while public investment contributed a further 0.1ppt. Nevertheless, with consumer spending growth still subdued and private investment having contracted, overall GDP is forecast to have expanded 0.5%Q/Q in Q3, to leave it 1.6% higher compared with a year earlier.

At face value, the latest BRC retail sales survey was alarming, with the headline measure of like-for-like sales down in November by 4.9%Y/Y, the biggest drop on the series going back to 1995. The figure failed to provide an accurate picture of sales last month, however, since it ignored the Black Friday shopping period at the end of the month, anecdotal evidence for which points to strong sales after consumers sat on the sidelines earlier in the month. We note that the ONS retail sales data will also incorporate Black Friday sales in the data for December rather than November. So, we expect a weak November offical reading for retail sales (due on 19 December) to be followed by a much stronger December reading.

Following yesterday’s downbeat manufacturing PMIs, today will bring the equivalent construction survey with the headline activity index expected to remain considerably below the key 50-level, signalling ongoing significant contraction in the sector.

Euro area:
Today will be a quiet day for economic data from the euro area, with just PPI data for October due. Expect a further decline in the annual rate to -1.8%Y/Y, the lowest in more than three years, not least due to lower energy inflation. Beyond the economic data, the European Parliament committee hearings into the ECB Executive Board nominees Isabel Schnabel and Fabio Panetta will be held while departing Board member Benoît Cœuré will also speak publicly.

In the US, today will bring November vehicle sales data, which are expected to reverse some but not all of the decline seen in October.

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