Australia: RBA Minutes And Rate Cut Considerations - Details Inside

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Includes: ANZBY, CBAUF, CMWAY, EWA, EWAS, NABZY, WBK, WEBNF
by: Interactive Brokers
Summary

Investors in the week ahead are set to receive fresh Australian inflation figures, as the country’s central bank begins to explore the potential for a cut to its cash rate.

In the Reserve Bank of Australia’s latest meeting minutes, members of the central bank’s Board discussed how weaker-than-expected data have fueled financial market participants’ expectations for an interest rate cut.

Meanwhile, the softness in Australia’s economy does not appear to have had a detrimental impact on its equity market, amid accommodative monetary policies across several global central banks.

Asia-Pacific: The Week Ahead (Apr 22-26)

Market participants in the week ahead are set to receive fresh Australian inflation figures, as the country’s central bank begins to explore the potential for a cut to its cash rate.

In the latest release of the Reserve Bank of Australia’s meeting minutes, members of the central bank’s Board discussed how weaker-than-expected data – notably the December quarter national accounts – have fueled financial market participants’ expectations for an interest rate cut.

The RBA observed that financial market pricing implied that the cash rate was expected to be lowered in the second half of 2019 and again in 2020.

At the bank’s monetary policy meeting in early April, the RBA elected to leave the cash rate unchanged at 1.50%, where it has resided since July 2016.

While the RBA has touted Australia’s labor market strength, underscored by a 4.9% unemployment rate – the lowest level in nearly eight years – GDP growth, it noted, illustrates “a softer picture of the economy.”

GDP rose by a meager 0.2% in the December quarter and grew by a mere 2.3% over 2018. The central bank mainly attributed the softness to weakness in real household disposable income, as well as housing market adjustments, which have been generally hampering consumption.

The RBA cited that growth in consumption had “clearly slowed” in the second half of 2018, marked by weakness in discretionary items, “especially those that have historically been most correlated with housing prices and housing turnover, such as motor vehicles and home furnishings.”

Moreover, the dampening of economic growth has also been influenced by temporary factors, including weather-related disruption to resource exports and fall-out from severe drought.

The latest minutes follow the RBA’s dovish tone at its February meeting, when it concluded that rate-setting risks had “shifted to be more evenly balanced,” compared to the previous tightening policy bias the bank had held.

AUD/USD remains rangebound

Against this backdrop, Marc Chandler, chief market strategist at Bannockburn Global Forex, recently noted that although the RBA’s minutes revealed the Board had discussed scenarios under which it may decide to slash rates, “officials indicated that the bar to a cut was still high.”

He also pointed out that employment data out of Sydney is set for release Thursday, which market participants will likely be eyeing, after the central bank considered under one scenario for a rate cut the potential reversal of labor market strength.

Chandler continued that given the RBA’s minutes, “the market is more likely to sell the Australian dollar on disappointment than buy on a strong report,” adding that the Aussie approached $0.7200 but has “backed off” and has not closed above that level for a little over two months.

The Australian dollar lost a little more than 10.25% of its value from its latest 52-week high set in April through January 2, 2019. It has since recovered only about 2.70% from that plunge.

The Australian Bureau of Statistics is scheduled to report on the country’s broader employment picture on Wednesday, May 15, after the RBA releases its next monetary policy statement on May 9.

In February, while the number of jobs increased by 4,600, most of that number comprised part-time positions, as full-time employment fell by 7,300.

Subdued inflation

Meanwhile, investors Tuesday, April 23, will receive a fresh gauge of Australia’s consumer prices, after the CPI rose 1.8% year-on-year in the December quarter 2018, a slightly slower pace than the 1.9% rate in the twelve months to the September quarter.

Tuesday, April 23

  • Consumer Price Index (Q1)

According to the ABS, the most significant price increases in the latest period were primarily attributed to tobacco (+9.4%), domestic holiday travel and accommodation (+6.2%) and fruit (+5.0%), while declines were highlighted by automotive fuel (-2.5%), audio visual and computing equipment (-3.3%), wine (-1.9%), and telecoms equipment and services (-1.5%).

Overall, while the rate of inflation in Australia generally remains low, the RBA expects it to gradually accelerate over the next couple of years, although it admits it “has been taking a little longer than expected.”

The central bank anticipates underlying inflation to come in at 2% in 2019 and 2.25% in 2020, but it expects headline inflation to decline in the near-term on the back of lower oil prices incurred earlier in the year.

Other data due out of Australia in the week ahead include:

Thursday, April 25

  • Import/Export Prices (Q1)
  • Producer Price Index (Q1)

Ex-exports, Australia’s Producer Price Index (PPI) had risen 0.5% in the December quarter 2018, mainly due to rises in the prices for heavy and civil engineering construction (+1.0%), partly offset by cost declines for petroleum refining and fuel manufacturing (-10.6%), as well as bakery goods production (-2.7%).

On a year-on-year basis, PPI rose 2.0% in the latest quarter.

EWA headed for a golden cross

Elsewhere, the softness in Australia’s economy does not appear to have had a detrimental impact on its equity market, amid accommodative monetary policies across several central banks, including the Bank of Japan, the European Central Bank and a more dovish stance from the U.S. Federal Reserve. Recent stimulus measures from China also seem to have helped prop-up that country’s economic health somewhat, with potential positive effects for trading partners such as Australia.

Australian equities – as evidenced by the iShares MSCI Australia ETF (NYSEARCA: EWA), which has among its top holdings several financial sector firms such as Commonwealth Bank Of Australia (OTCMKTS: CMWAY), Westpac Banking Corp (NYSE: WBK) Australia And New Zealand Banking (OTCMKTS: ANZBY) and National Australia Bank (OTCMKTS: NABZY) – have climbed roughly 19.20% from their most recent 52-week low set December 24, 2018, nearly erasing its more than 20.5% plunge in the second half of 2018.

In fact, EWA appears headed for a golden cross, with its 50-day moving average nearly converging with, and potentially rising above, its 200-day moving average.

Investors will likely be eyeing further developments in Australia’s labor market, as well as domestic factors that have been stunting growth, including consumption and housing. Market participants will also likely be paying close attention to global uncertainties, such as the unfolding of U.S.-China trade talks, Brexit and oil prices for additional insights into the country’s general economic and financial well-being.

Note: This material was originally published on IBKR Traders' Insight on April 16, 2019.

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