Via Damien Boey at Credit Suisse:
Minutes from the RBA’s early August meeting were somewhat dovish in tone. We note the following key paragraphs:
- The Bank’s response function only allows for a brief pause to “wait and see”: “Having eased monetary policy at the previous two meetings, the Board judged it appropriate to assess developments in the global and domestic economies before considering further change to the setting of monetary policy. Members would consider a further easing of monetary policy if the accumulation of additional evidence suggested this was needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
- Unconventional monetary policy is on the agenda: “Members reviewed the experience of other advanced economies with unconventional monetary policy measures over the preceding decade. These measures comprised: very low and negative policy interest rates; explicit forward guidance; lowering longer-term risk-free rates by purchasing government securities; providing longer-term funding to banks to support credit creation; purchasing private sector assets; and foreign exchange intervention … One key lesson was that the effectiveness of these measures depended upon the specific circumstances facing each economy and the nature of its financial system. Some measures had been successful in reducing government bond yields, which had flowed through to lower interest rates for private borrowers. Other measures had been effective in addressing dislocations in credit supply. Members noted that a package of measures tended to be more effective than measures implemented in isolation. Finally, it was important for the central bank to communicate clearly and consistently about these measures.”
- There is downside risk to the global growth outlook from trade and technology disputes: “Growth in major trading partners was expected to slow a little in 2019 and 2020. This outlook had been revised down a little since the May Statement on Monetary Policy in light of the escalation of the US–China trade and technology disputes and the related weakness in indicators of investment. Members noted the recent announcement by the US administration of a 10 per cent tariff to be imposed on a further US$300 billion of Chinese exports to the United States. Further escalation presented a downside risk to the outlook, particularly if heightened uncertainty weighed further on business investment. Members noted that investment intentions had already eased significantly in a number of economies, including the United States and the euro area, and investment had fallen in a number of economies with a high exposure to international trade, including South Korea.”
Officials discussed “particularly weak” growth in consumption per capita, but were hopeful that tax cuts and rate cuts would help turn growth around. Officials were also hopeful that the terms of trade boost would flow through to some mining capex growth and to government spending.
Overall, we see the RBA as captive to bond market pricing and global uncertainties, just like every other central bank around the world at present. A September easing is unlikely given that the Bank is prepared to wait for more information about the global and domestic outlooks before considering further adjustments. But more easing in 4Q is clearly in view. All of this said, we are share the Bank’s optimism about the easing of financial conditions that has already occurred, and are looking for upward inflection in the data in 4Q. We also think that there are good reasons to believe that global bond yields will rise from currently expensive levels, especially once we see evidence of peak political uncertainty or reflation. Should bond yields globally bottom out, some of the pressure on the RBA to cut rates will ease, and we should see the Bank’s narrative more firmly emphasize steepening prospects. Curve steepening favours value investing within the equity market, even as lower rates support quality.
I disagree with the conclusion. Data is not going to improve in Q4. It will get worse as the dual construction bust – dwellings and infrastructure – deepens, even if stabilising house prices take a little pressure off consumption.
As well, external circumstances will keep getting worse as global easing lags the impact of the trade war, Brexit, Hong Kong crisis and commodity price weakness, particularly in bulks and oil.
Yields will keep falling. Cuts galore ahead.