New Inflation Figure Leaves Shadow Board’s Recommendation Unchanged
The latest data (for the June quarter) shows that CPI inflation ticked up from 1.9% to 2.1%, back inside the Reserve Bank of Australia’s official target band of 2-3%. The unemployment rate remained steady at 5.4%. The RBA Shadow Board rules out any likelihood that a reduction in interest rates could be called for. Instead, it attaches a 49% probability that holding interest rates steady at 1.5% is the appropriate setting, while the confidence in a required rate hike equals 51%.
The seasonally adjusted unemployment rate in Australia, according to the latest ABS figures, remains at 5.4% (June figure). More than 50,000 jobs were created in June, 80% of them full-time. The labour force participation rate edged up again, to 65.7%, which is the reason why the strong employment growth did not translate into a lower unemployment rate. Nominal wages growth still stands at 2.1%, a number which most economists hope will be considerably higher at the next release.
The Aussie dollar, relative to the US dollar, has been largely moving sideways, within a range of 73-75 US¢. Yields on Australian 10-year government bonds have rebounded from their recent low in early July, most recently equalling 2.73%. The Australian stock market has also consolidated, remaining range bound; the S&P/ASX 200 stock index has been see-sawing between 6,200 and 6,300.
US growth in the second quarter equalled 4.1%, while US unemployment was 4%, somewhat below the consensus estimate of the natural rate of unemployment. This suggests that inflationary pressures may be building and lends additional support to the Federal Reserve Bank’s announced strategy of gradually lifting the cash rate. Markets are anticipating one or two more quarter-point hikes before December. On the other hand, the US administration’s recent increase in tariffs and the ensuing retaliations are cause for concern, particularly if this tit-for-tat culminates into a full-blown trade war, which will also adversely affect the Australian economy. Energy prices, while volatile, have not shown a clear direction.
The Australian balance-of-trade posted its largest monthly surplus in more than a year, while the current account remains firmly in deficit, at around 3% of GDP. The government debt-to-GDP ratio is around 42%, continuing its steady climb since the GFC ten years ago. The terms-of-trade have stabilized around 90 index points, about half-way between the 2011 peak and the 2016 trough.
Consumer confidence, as measured by the Westpac Melbourne Institute Consumer Sentiment Index, rose from 102 in the previous month to 106 in the current month. Business confidence, according to the NAB business confidence index, barely budged. The manufacturing PMI continued its decline, from 57 to 52 in 52 in July, whereas the services PMI rose for another month, from 59 in May to 63 in June. Capacity utilization picked up slightly to just above 82% in June. In spite of an increase in building permits by 6.4% in June, the Australian housing market appears to cool off further.
The distribution of the Shadow Board’s policy preferences has again remained stable. The Shadow Board is 49% confident that keeping interest rates on hold is the appropriate policy, the same as one month ago. It attaches zero probability that a rate cut is appropriate (unchanged) and a 51% probability (unchanged) that a rate rise, to 1.75% or higher, is appropriate.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50% equals 21%, just one percentage point down from the previous month. The estimated need for an interest rate decrease is 4%, while the probability attached to a required increase equals 75% (73% in July). The numbers for the recommendations a year out have likewise barely changed. The Shadow Board members’ confidence that the cash rate should be held steady equals 16% (15% in July), while the confidence in a required cash rate decrease equals 6% (5% in July), and in a required cash rate increase 79% (80% in July).
Warwick McKibbin has turned uber-hawk (or is that loony-hawk):
Doubts are creeping in for Bloxo:
And Jeffry Sheen is onto it:
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As stated last month, there is an increasing risk that the global economy is about to peak. Though the US has recorded a high rate of 4.1% for GDP growth in Q2 2018, that appears due to front-loaded exports in anticipation of tariff hikes. Leading indicators from China, Japan and Europe suggest weakened growth. Macroprudential controls of the financial system are probably too tight in Australia and in many other financial centres, given the circumstances. We are already seeing major Australian banks cutting their variable and fixed mortgage rates, which is evidence that financial institutions have been unable to match the demand for credit. A housing price crash is an unacceptable risk for the macroeconomy. Lending for business investment needs further encouragement. Therefore the central bank should signal that there is unlikely to be a cash rate increase in 2019, and that the probability of a cut has significantly increased.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
