Australia’s CPI is on the rise but not enough to dissuade the central bank from again cutting rates
Following a big week on the economic news front the RBA could make its next cash rate move in December
2 November 2019 | Shane Oliver, Chief Economist AMP Capital
Australia’s September quarter inflation figure released this week was 1.7% year on year with the average of the core measures at 1.4% year on year. This was soft but looks unlikely to move the Reserve Bank to ease in November following recent comments by RBA Governor Philip Lowe suggesting greater confidence in a “gentle upturn” in the economy and patience in getting inflation back to target all of which suggests the RBA is in little hurry to cut rates just yet.
We continue to see the cash rate being cut to a low of 0.25% but now see the timing as being December and February but this could also come with quantitative easing measures designed to lower bank funding costs and increase the banks’ pass through of rate cuts to borrowers.
Growth is likely to remain subdued and below trend for longer than the RBA is allowing. This will keep unemployment higher for longer and wages growth and inflation below target for longer. In fact, the RBA is likely to revise down yet again its growth and inflation forecasts when it releases its quarterly Statement on Monetary Policy on Friday.
Concerns remain for RBA on its inflation and employment targets
Consequently, more easing will be required to achieve full employment and clear progress to the inflation target. What’s more inflation has been running below target for more than four years now and the longer this is allowed to persist the more the inflation target will lose credibility and won’t be the “strong nominal anchor that people can rely on when making their decisions” as Lowe has stated the Board is seeking to provide.
The perception that the RBA is now less inclined to ease further also risks pushing the Australia dollar higher, wiping out one transmission mechanism for monetary easing that the RBA can still rely on. The less dovish tilt the RBA has taken in October has already seen the $A rise by more than 3% which is a defacto monetary tightening and is the last thing the economy needs.
The past week saw most share markets in positive territory helped by a solid US jobs report, China indicating that it had reached “consensus in principle” with US negotiators in phase one trade talks, good US earnings results and Fed easing.
For the week US shares rose 1.5% to a new record high, Eurozone shares rose 0.4%, Japanese shares gained 0.2% and Chinese shares rose 1.4% helped by news of a rise in the Caixin manufacturing conditions index.
However, Australian shares closed before the good news on US jobs and trade, and increasing talk that the RBA may be done cutting saw the ASX 200 fall 1% for the week led down by financials, consumer and energy shares.
Bond yields fell slightly in the US, Germany and Japan but rose in Australia. Oil and metal prices fell slightly, and the iron ore price had another sharp fall as the surge on the back of the Vale outage continues to unwind. The Australian dollar rose as the Fed cut rates and as expectations for further RBA rate cuts were reduced.
US Federal Reserve cut rates by another 0.25%
This easing cycle has been all about taking out insurance against trade war uncertainty and weaker global growth adversely affecting the US economy – a bit like the Fed easings of 1987, 1995/96 and 1998. These were all just 0.75% which is what we have now seen so far this year.
This week’s cut took the Fed Funds rate to a range of 1.5-1.75%; it’s likely now at, or close to, the low. The latest trade truce between the US and China has a greater chance of success this time as President Trump wants to keep the US economy strong ahead of next year’s presidential election and wants good news in the face of the now formalised impeachment inquiry.
US bond yields are up from their lows; the US yield curve is now positive across most maturities suggesting less risk of recession; US economic data including the latest round of jobs and PMI data suggests it’s on track for a soft landing.
Positive news on the US jobs front
October’s US jobs data was particularly positive with much stronger than expected jobs growth of 125,000 (despite a GM strike detracting around 52,000 jobs). Unemployment edged up slightly due to a rise in participation but to a still ultra-low 3.6% and the sum of unemployment plus underemployment remaining very low at 7% (compared to 13.5% in Australia).
Meanwhile wages growth remained weak at 3% year on year over the year to October. Growth in employment costs over the year to the September quarter also remained subdued at 2.8%.
US September quarter earnings results remain reasonable. 72% of S&P500 companies have now reported, with 80% beating earnings expectations (against a norm of 75%) by an average of 4.7% and 61% beating on sales.
Europe and China data
Eurozone September quarter GDP growth was soft at 0.2% quarter on quarter or 1.1% year on year but it was stronger than expected, it is still growing and with population growth around 0.2% pa it means per capita GDP growth is 0.9% which is stronger than in Australia (at -0.2%).
In other data, Eurozone economic confidence fell further in October, unemployment remained flat at 7.5% in September and core inflation for October rose slightly to 1.1% year-on-year but is in the same weak range it’s been in since 2017.
Just to confuse China data sceptics: the official October manufacturing PMI fell but the Caixin/Markit manufacturing PMI (a private sector survey) rose to its strongest reading since December 2016. So much for the theory that official Chinese data only presents good news. The bias towards large state-owned companies in the official PMI may be weighing on it but the truth is probably somewhere in between with growth tracking sideways.
Dr. Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital