It’s another big week for the RBA this week. We get the minutes to the February meeting on Tuesday at 1130 AEDT, the RBA Governor Glenn Stevens speaks on an ASIC panel a little later that day (1330 AEDT) and then the same man puts in an appearance before the House Economics Committee on Friday (starts 0930 AEDT). I think the message that will come through all of these will be the same – just a reinforcement of what we have heard in the press release, the SOMP and Deputy Governor Philip Lowe’s speech over the last two weeks.
Overall, we know the domestic economy is holding up very well with growth about trend. It doesn’t feel that way because of the news flow by and large, which, more often than not is misleading in the extreme. Note that the unemployment rate is at 5.1 per cent. Global growth remains robust as well, notwithstanding a negative quarter of growth in Europe. Otherwise, growth in the US is much better than most hoped – no double dip and it’s actually accelerating.
The market still prices a 100 per cent chance that the cash rate will be cut twice more to 3.75 per cent by mid-year (first cut in April) with another 35 per cent or so priced for 3.5 per cent. The RBA has made clear that a "material decline" in demand would be required to see rates cut further, given that domestic demand is growing at a decent clip and that inflation currently sits at the middle of the band – risks are "evenly balanced", the truth of which current market pricing doesn’t acknowledge.
So this is where we sit and I’m not sure that we will learn too much in addition this week. It may be interesting to read how close the call was, but that’s it. The press release a couple of weeks ago didn’t seem to imply that it was a close call. With what we know then, it is more likely that we will have a lengthy period of stable rates. In truth, unless we see a genuine material decline this is by far the best outcome. Consider that after the RBA cut rates in November and December, consumer confidence actually fell. The reason? Because people rightly assume that things must be deteriorating if the central bank is cutting rates – despite what were generally positive economic outcomes. The RBA’s decision is being used as a signal of economic well being. So unless we really, sincerely need lower rates – and I don’t believe that we do – the RBA board would be best advised to leave rates steady.
Other than that, the other major piece of domestic economic news concerns wage growth, with the wage price index out on Wednesday (1130 AEDT) and average weekly earnings out on Thursday (1130 AEDT). Wage prices give the better measure of wage inflation while weekly earnings give a better measure of what consumers have to spend. So both data prices are useful. Suffice to say that wage inflation remains modest at the moment, rising by 3.6 per cent year-on-year to the September quarter. Generally you’d need to see something in the 4.5 to five per cent range, depending on other inflationary trends, for the RBA to be 'worried' by wage inflation. So we are some way from that and still some way off the recent peak in 2008 of 4.3 per cent year-on-year.
In contrast, the US data flow is quite light and largely about housing. Existing home sales (January) are out on Thursday night (2am), and then we see house prices for December (from the Federal Housing Finance Agency) and new home sales for January, both due Friday.
In Europe it’s worth noting a couple of releases – the February PMI’s, German IFO survey, etc. But of course anything to do with the Greek bailout will absorb the press.