RBA minutes leave further easing on the table

Chris Scicluna
Emily Nicol

With US stocks lacking direction yesterday (the S&P500 closed effectively unchanged on the day), the tone in Asian equity markets today was less favourable. China’s CSI300 reversed yesterday’s gain, dropping 0.5%. And as Japan’s markets reopened after the national holiday, the Topix also closed down 0.5% even as the yen depreciated slightly back to 108.1/$. Having made gains throughout yesterday, USTs were little changed, with 10Y yields at 2.09%, some 5bps lower than their level this time yesterday. ACGBs made gains (10Y yields down 5bps to 1.40%) to catch up with yesterday’s moves in USTs and the AUD weakened a touch as the minutes of the RBA’s July policy meeting, when the cash rate was cut once again, provided no surprises but reaffirmed our expectation of further Aussie policy easing before year-end. Looking ahead, today brings the week’s most notable US data releases – June retail sales and IP – as well as the first of three key UK releases due this week, the latest labour market figures.

With no data of note from Asian-Pacific countries overnight, focus turned to the minutes from the RBA’s latest policy-setting meeting, which saw it cut the cash rate by a further 25bps to 1.00%. Consistent with the post-meeting statement, the minutes had a dovish feel to them, with the RBA seemingly leaving the door open to further easing this year even if it was not explicit on the matter. Certainly, the minutes highlighted that growth had been well below trend in the first quarter of the year and was only expected to return to trend, rather than above, over coming years despite recent monetary and fiscal easing. Despite strong employment growth, members recognised that a further increase in labour force participation had contributed to leaving the unemployment rate at an elevated level, while wage growth had remained low. And with forward-looking indicators suggesting that employment growth would moderate over coming months, the RBA also acknowledged that spare capacity in the labour market was likely to persist.

In this respect, Thursday’s jobs report will need to be closely watched, while the latest inflation release at the end of this month and wage figures in mid-August will also have influence on future policy decisions. But in the absence of sudden labour market tightening, further easing will be required to meet the inflation target over coming years. The OIS market is currently pricing in a probability of more than 50% of a further 25bps cut in November, which seems entirely credible to us.

Euro area:
In the euro area, today will bring a few releases of note including trade figures for May, which are expected to show that the adjusted trade surplus almost fully reversed the €3.3bn fall in April on the back of an improvement in exports. This morning will also bring the first insight in economic sentiment at the start of the third quarter in the euro area’s largest member state, with the German ZEW survey of financial market participants expected to remain broadly downbeat about the state of current and future conditions. And ahead of tomorrow’s final euro area inflation figures – where we expect the headline rate to be revised slightly higher from the preliminary release on the back of the upwards revision to German figures – today will bring final CPI data from Italy, which are likely to confirm the flash estimate showing the headline EU-harmonised rate edging slightly lower in June, down 0.1ppt to 0.8%Y/Y.

Politics-wise, MEPs will vote this evening whether or not to reject the EU leaders' nomination to be the next head of the European Commission, Ursula von der Leyen.

Focus in the UK today will be firmly on employment and wage figures for May. Having risen to a record high in April, employment is likely to have fallen back in May, not least with firms increasingly downbeat about the near-term outlook in light of persistent Brexit uncertainty. Nevertheless, given the recent profile we would expect the three-month jobs growth number to have remained positive. Having slowed to a seven-month low in April, wage growth will also be closely watched with an eye on BoE policy.

Elsewhere, BoE Governor Carney is due to speak at an event in Paris, while in the markets the DMO will sell 2037 Gilts.

It will be a busy day for key economic releases from the US, including industrial production and retail sales figures for June. Expectations are for retail sales growth to have slowed at the end of the second quarter, albeit in part due to lower gasoline prices weighing on the auto fuel component. Meanwhile, manufacturing output is likely to have posted a modest increase for the second successive month, following marked weakness in the first four months of the year.

This afternoon will also bring business inventories figures for May, import and export price indices for June and the NAHB housing index for July.

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