Previewing the RBA's last hurrah for 2017, and the deluge of economic data for the week ahead.
In the lead-up to the festive season, one would hope for a slow and steady retreat into holiday mode, but economic data is likely to make it anything but.
In fact, it could be argued the following two weeks are the busiest of the year. We have the final central bank meetings for 2017, final employment reads, final terms of trade, as well as the start of Q4 data (October) in construction, retail sales, fixed asset investment, industrial production and PMIs. That's a lot.
Let's concentrate on this week's events that are likely to have the most impact on the market.
Tuesday: RBA, retail sales and China
It's the Reserve Bank's last meeting for 2017 on Tuesday, and it's also the RBA's last meeting for the next eight weeks. There will be no movement in the cash rate, so it's all about the RBA's statement this time. The three points to look for are:
- Wage ‘emphasis'. Since the release of the Q3 wage index, the market and the RBA have been placing more and more ‘emphasis' on the importance of wages increasing in 2018. This emphasis has been to the point of wage growth almost being framed as an economic imperative. If the RBA's statement indicates this is the chief reason Australia's economic environment is not conducive to rate movements, then wages should form the cornerstone of economic confidence and rate forecasts going forward.
- Inflation ‘stagnation'. As a flow-through from the wage growth narrative, core inflation is not forecasted to cross into the target band in the next two years. And when we strip out housing, core inflation slips even further to the downside. If this is to be remedied, consumption inflation is the area to watch. The RBA will likely highlight this.
- Growth. The bright point for the RBA is that growth is actually materialising. Net exports, government spending, and now private spending, are all expanding. Growth is, therefore, on track for 3 per cent year-on-year. This gives the RBA a core reason to keep the cash rate on hold for now, as well as a possible reason to increase rates in the medium-term future.
Also on Tuesday, Australian retail data drops for October. It's likely to be a stodgy data set, mirroring the market releases from the discretionary space in November.
Meanwhile, China is due to release its SME Caixin PMI data on Tuesday.
As always, for reactions to the three data drops mentioned above, you can't look past the Australian dollar.
Thursday: Bank of Canada and Australia's trade balance
The Bank of Canada isn't something I would normally highlight, but the Canadian economy is very similar in nature to the Australian economy.
The Bank of Canada has surprised global markets twice already this year. The first time was when it raised rates ahead of forecasts, and the second time, when it aggressively forecasted oil to the upside. Oil is at a 2.5-year high… could we see a third surprise?
Also out on Thursday is Australia's trade balance for October. Terms of trade have been solid in 2017, but October marked the first month in the last six months that China backed off in the bulk commodity space. This could have a flow-on effect to material stocks which, to date, have been flying off the back of bulk pricing and expectations of a strong finish to 2018. (Remember this is retrospective data, look forward.)
Friday: China's trade balance and the Fed
On Friday, China's trade balance will be published to market. Activity in November at Chinese ports was certainly making up for the October slowdown.
With Europe showing strong signs of growth, and being China's second-largest export market, the forecasters predict a solid snapback in November. Exports are forecasted to grow by 8 per cent.
The Australian link here is demand for Chinese goods means demand for Australian bulk commodities.
Lastly, let's take a quick trip to the US, just for non-farm payrolls on Friday.
This is the final data drop for US employment for 2017. It's also the penultimate read of the Janet Yellen era. Given this, incoming US Federal Reserve chair Jerome Powell's comments from last week seem slightly more important, especially when he alluded to making sure the Fed reaches its mandate of ‘full employment'.
More and more economists are now pointing to average hourly earnings as the most important part of non-farm payrolls data. As in Australia, US employment is booming, yet wage growth remains dismal.
Powell appears to be looking for reasons to move the Fed from ‘gradual rate rises' to a glacial rise. If the market sniffs this as a possibility, US dollar pricing will come under pressure and US equities might just find another leg to stand on.
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