Everyone is waiting for today’s CPI number as the pivot for whether or not the RBA will cut interest rates again in August. It’s only natural but it’s wrong.
Economic data has clearly weakened since the June meeting with unemployment jumping to 5.7% and proximate indicators staying soft, the NAB survey hit four year lows, house prices have had a decent mid year run but mortgages look to be slowing now, consumer confidence hasn’t budged, new car sales have peaked and retail sales have flat-lined. The AiG’s three survey’s for manufacturing, services and construction are all stuck in recession. First quarter ABS dwelling and engineering construction data were both soft.
This is all new data since the last rates meeting.
If someone can tell me where second quarter growth is going to come from I’m all ears. Private investment is likely to fall with the mining downdraft outweighing non-mining investment. If anything, consumption has decelerated since the first quarter. Public investment and expenditure is a bit of a lottery but is in a context of tightening. Inventories appear to be falling. That leaves net exports.
On top of this the Chinese commitment to rebalancing is becoming more obvious, the mining boom is unwinding more swiftly than the RBA imagined, and a very big rebalancing will be needed that hasn’t yet happened. As well, the US taper is in doubt, once again lifting the local currency.
Yet markets are pricing the rate meeting at only a 65% chance of a cut with 50% of economist saying no. 42bp of cuts are priced in over the next 12 months, which is also wrong.
If CPI comes in high today on tradeable inflation then the RBA will look through it given this context. If the non-tradable inflation is strong it won’t be for long as the economic deterioration continues to loosen the labour market.
An August rate cut is as certain as these things can be.
