On my view of the world and domestic economy, the RBA (announcement this Tuesday at 1430 AEDT) wouldn’t be cutting rates. But about the only thing I do know is that the RBA board does not share my view of the world – or the domestic economy. They are much more pessimistic and have cut twice already. Me, I wouldn’t have done it, especially when the Australian economy is accelerating to such an extent that third-quarter private demand was the strongest in about in four years.
Against that backdrop it’s very difficult to try and figure what the RBA is going to do. As far as I can tell, the case for a cut isn’t based on any real economic weakness yet, or even forecasts of weakness (a point acknowledged in the RBA minutes). Added to strong private demand we have an unemployment rate that sits around 5.25 per cent, which is very low relative to history and barely above any concept of NAIRU or full-employment. You can see the direction the economy is/has been taking by the fairly rapid acceleration in consumer spending that we saw in 2011. Especially retail spending, which averaged growth almost 1 per cent per quarter in the three quarters of 2011, compared to a flat outcome in the second half of 2010. Investment, we know, is strong across the board.
CPI, it is fair to say, isn’t the problem that data for the March and June quarter 2011 suggested it was. A good thing given the very rapid increase in core inflation over that period. Nevertheless, it’s not clear that CPI, or underlying inflation pressures, have really moderated that much either. Changes to ABS methodology cloud the picture somewhat as does commodity price volatility. Not to mention the impact of the European crisis.
You can contrast this with NZ, where the data is unequivocal – inflation is not a problem there and it’s very clear the RBNZ can now do nothing for quite some time or even ease further if needs be. Unfortunately, there are still question marks in the Aussie context and inflation globally is still elevated – actually above target – in most economies.
In the Australian context and on reasonably modest assumptions (0.7 per cent quarter-on-quarter, which is just below the 5-year and 10-year average of 0.8 per cent), core CPI will tend toward 2.75 per cent by year-end. Assuming the average, core CPI will be at 3.25 per cent in a clear signal that monetary settings are too easy.
When you look at the fact that US data is picking up, that Asian growth remains strong and that Europe is stabilising, then in my opinion there really aren’t too many reasons to cut rates again. The minutes to the November and December meetings suggest the decision to cut was close and it’s been said many times that if those decisions were close, then the case this month is non-existent. And that is obviously my position.
Offsetting the economic backdrop, the realpolitik certainly suggests we’ll get another cut. Australia’s Treasurer has made it plain where he thinks rates should go, as have business groups. There is enormous ongoing pressure for the RBA to cut, accompanied by frequent press reports of massive job shedding. Consequently, there is a huge sense of foreboding in the Aussie market which isn’t quite justifiable from the data the way I see it. So while most economists look for a cut (24 of 27), they’d be hard pressed to find an economic justification for it. Indeed while many global stress indicators have eased sharply over the last few months – euro/US dollar basis, Italian and Spanish spreads to bunds, the VIX index – this isn’t being reflected in economic discussion or even money markets here, which continue to price one outcome and that is a European collapse. OIS and IBs have a cut priced at 76 per cent with the cash rate heading to 3.25 per cent by year-end. Things 'feel' bad in Australia, and consequently there is an enormous amount of confirmation bias at the moment. Again, all of that leans toward another cut.
I have no strong sense then of whether they will cut or not. Business groups and the government certainly have the numbers on the Board as we’ve already seen. They should hold on any reasonable logic or analysis for mine, but I don’t know if they will. Either way I think we are near the trough. So for mine, if they don’t go in February, I doubt they’ll go again. Similarly if they do go in February, I doubt they’ll go again. The pressure for them to cut again will be far too difficult to maintain with global and domestic economic data continuing to lift – especially after those US payrolls. There was little economic argument for a cut in December by the Board’s own admission. There is less so now and there will be even less of a case in another month or so the way things look at the moment – especially as it is unlikely that banks will pass it on. Obviously Europe can change that, but you can only pre-empt one (of many) outcome for so long.
Prior to the RBA meeting we get the ABS monthly retail sales numbers today (1130 AEDT) for December and the December quarter. These monthly numbers have been showing that retail spending is lacklustre. Nevertheless, the national accounts, which are much broader in scope, show retail spending is significantly stronger. The consensus is that monthly sales will rise 0.2 per cent (me at 0.4 per cent), while sales for the quarter are expected at 0.6 per cent (me at 0.8 per cent). Other than that we get Westpac’s consumer confidence survey on Wednesday at 1030, while the RBA release the Statement on Monetary Policy on Friday (1130). I’m not looking for the bank’s forecast to change too much from November – growth at between 3-3.5 per cent year-on-year to December 2012 with core inflation at 2.75 per cent or 2.5 per cent without the carbon price.
As for NZ (holiday today), they release earnings data tomorrow at 0845 AEDT and employment data on Thursday at 0845. The market looks for the unemployment rate to dip to 6.5 per cent in the fourth quarter, from 6.6 per cent.
Looking around the globe, most of the major data is outside the US this week. Indeed US data is largely confined to Friday, when we see trade numbers for December and Michigan Uni’s consumer confidence numbers for February. There is a bit of Fed speak strewn through the week which is worth watching – Bullard and Fisher tonight and Bernanke to the Senate on Tuesday night. Otherwise the global data worth watching includes German factory orders tonight and industrial production tomorrow (both December numbers). We the have Chinese inflation numbers on Thursday (1230), followed by UK industrial production and the ECB and BoE meetings. The ECB aren’t expected to do anything although the BoE are expected to print more money – a further £50 billion. Friday sees India’s industrial production figures and Chinese trade data.
That’s pretty much it. The drama in Greece obviously continues and the latest press reports (an hour so old) quote the Greek Finance minister as saying that Greece is on a knife-edge and only has hours to sign off on the €130 billion rescue package. That’s hours from now apparently so watch for any headlines this morning.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter