RBA signals June rate cut after Powell leaves powder dry

Chris Scicluna
Emily Nicol

While European and US stocks lost ground yesterday as the trade war weighed particularly on the tech sector, most of the main indices in the Asia-Pacific region have fared better today after a late announcement by the Trump administration that it will allow US firms to continue to do business with Huawei for another three months. So, China’s CSI300 more than reversed yesterday’s loss with a rise of 1.4%. And while Korea’s latest trade data pointed to ongoing weakness in semiconductor shipments and total exports to China in the current month, the KOSPI index edged higher, closing up 0.3%. Despite a better afternoon session and a slight weakening in the yen (back to 110.2/$), however, Japan’s Topix closed down 0.3%, more than reversing yesterday’s modest rise (see below for detail on today’s Japanese economic data, on quarterly bank loans and overseas visitors).

In the bond market, meanwhile, JGBs were stable (10Y yields remaining at -0.05%), and UST yields ticked up slightly (10Y to 2.42%) after Fed Chair Powell last night provided a balanced, but broadly upbeat, assessment of economic conditions and financial stability risks in a speech that focused principally on issues related to rising business sector debt. But most notable were developments in ACGBs – having initially made losses as Australia’s PRA proposed an easing of mortgage lending standards in the face of ongoing housing market weakness, Aussie bonds rallied (10Y yields down to a new low of 1.63%) after RBA Governor Lowe said that policymakers would consider a rate cut at their next monetary policy meeting on 4 June, stating that a “lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target”. The market-implied probability of an Aussie rate cut next month rose to close to 75%, having dipped below 60% yesterday in the aftermath of the weekend’s surprise general election result.

In Europe, government bonds have followed USTs lower upon opening, with 10Y Bund yields up to -0.08%, while equities have opened higher across the board. Looking ahead to the rest of the day, the data calendar seems unlikely to be earth-shattering, bringing a UK survey of industrial sector trends, the flash estimate of euro area consumer confidence, and US existing home sale numbers. Meanwhile, Brexit and politics will continue to dominate in the UK, with Theresa May’s Cabinet set to discuss her supposed “bold new” offer to Labour MPs to be incorporated in her draft Withdrawal Agreement Bill ahead of a parliamentary vote early next month.    

After yesterday’s GDP report showed that private non-residential investment fell at the start of the year, the BoJ’s latest quarterly bank lending figures revealed that the amount of new loans for fixed investment also fell in Q1. As a result, the year-on-year increase in the total outstanding amount of loans for fixed investment moderated slightly, by 0.1ppt to 3.4%Y/Y, the softest pace for three years.

Overall growth in the total value of outstanding loans remained steady, however, at 2.9%Y/Y. In terms of business loans, an acceleration in the value of outstanding loans to manufacturers to 5½%Y/Y, the firmest increase since Q309 contrasted with an easing in the rate of increase in outstanding loans to non-manufacturers to 3.2%Y/Y, the weakest since Q316.

Turning to households, there was a notable increase in the amount of new loans for housing investment – seemingly tallying with the recent pickup in residential investment ahead of October’s consumption tax hike – although growth in the total amount of outstanding loans for housing investment was steady at 2.4%Y/Y in Q1. In marked contrast – but not inconsistent with the recent weakness in consumer spending and confidence – the total amount of consumer credit outstanding was down 0.1%Y/Y, the first negative annual growth for seven years. Loans outstanding to local governments fell 1.8%Y/Y, the first negative reading since 2001.     

Meanwhile, overseas visitor numbers for April showed that the year-on-year increase moderated notably last month, by almost 5ppts to 0.9%Y/Y. Tallying with the strong growth in activity recently reported in the hospitality sector, the number of overseas visitors was still up a relatively healthy 4.4%Y/Y over the first four months of 2018. That, however, is just half the growth rate in visitor numbers over 2018 as a whole.

Despite the moderation in growth, April still saw a record monthly number of tourist arrivals, at 2.9mn. Visitors from China (up 6.3%Y/Y) continued to account for the largest share, followed closely by South Korea (nevertheless down a steep 11.3%Y/Y). In addition, there was also a notable increase in visitors from Thailand, Australia and various European countries.   

Euro area:
The most noteworthy economic release from the euro area today will be Commission’s flash consumer confidence indicator for May. After an improvement in sentiment in the first quarter led principally by France, the survey suggested that households were once again more downbeat at the start of the second quarter, with the index falling ½pt in April to -7.9, the second-lowest reading for more than two years. And the consensus expectation is for only a modest pickup in confidence this month. This morning will also see ECB Vice President Luis de Guindos speak publicly in London.

With Theresa May’s Cabinet set today to discuss her supposedly “bold new” Brexit offer aimed at winning the support of Labour MPs – reportedly just reheated commitments on workers’ rights and environmental standards – when her Withdrawal Agreement Bill is voted upon by MPs early next month, yesterday evening saw BoE Deputy Governor Ben Broadbent highlight the toll being taken by Brexit on business capex in the UK. Having fallen steadily last year in marked contrast to the global trend as firms decided to postpone significant new investments until the uncertainty lifted, Broadbent noted that a no-deal Brexit – which is seemingly attracting increasing support within the Conservative party, including among the candidates to succeed Theresa May as PM – would simply mean that “projects delayed will instead be cancelled”, with significant harm for future UK economic growth. That message is set to today to be echoed by Chancellor Philip Hammond in a speech to the CBI, warning Conservative leadership contenders not "knowingly to inflict damage" on the economy by pushing for a no-deal Brexit. Of course, there is a strong probability that May’s successor will indeed be an advocate of no deal. But – not least given the Parliamentary arithmetic – we think that MPs would act to prevent such a damaging path coming to fruition.

It should be a relatively quiet day for UK economic data today, with just the CBI’s industrial trends survey for May likely to illustrate the ongoing negative impact of Brexit uncertainty on UK manufacturers. Indeed, the survey reported a marked drop in both the total orders and expected output indictors in April, a trend that seems likely to continue over coming months too.

Last night’s speech by Fed Chair Powell at the Atlanta Fed’s annual financial markets conference on Amelia Island focused principally on his assessment of the risks posed by rising business debt, acknowledging that “business debt is near record levels, and recent issuance has been concentrated in the riskiest segments” and “if a downturn were to arrive unexpectedly, some firms would face challenges.”  But he concluded that “business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate”, and noted that “the financial system appears strong enough to handle potential losses”. More generally, he was broadly upbeat, stating “Despite crosscurrents, the economy is showing continued growth, strong job creation, and rising wages, all in a context of muted inflation pressures.”

Datawise, today will bring US existing home sales figures for April. With mortgage rates having remained favourable last month, existing home sales are likely to remain close to March’s level, albeit remaining off the average in the first half of last year.

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