2nd Quarter GDP signals the RBA will remain on hold. Rate cuts not in serious contemplation for now.
The September RBA board meeting will be held next Tuesday 7 September.
As a consequence of the later-in-the month meeting (held on the first Tuesday of each month), RBA board members this month will have the benefit of considering additional data that has been stronger than forecast.
Recent data prints on the stronger side.
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2ndQ GDP was +1.2%, higher than estimates, and 3.3% YoY, and up from 2.7% YoY three months ago. The outcome has nudged above year-end RBA forecasts of 3.25% for December 2010.
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Retail Sales for July 2010 came in at 0.7% and above estimates and an increase on the prior month of +0.4% revised.
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Building approvals, released late in August also surprised to the upside, coming in at +2.3% for the month and +11.0% YoY.
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PR data-Rismark reported that house prices rose 0.4% in July and 9.7% annually, although the annual rate of growth slowed in the last three months.
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all in all, recent domestic data continues to demonstrate solid growth in Australia, in sharp contrast to the growth downgrades in the US. Furthermore strong export growth, which contributed +0.4% to 2ndQ GDP is expected to continue throughout 2010, producing favourable terms of trade.
Expectations for RBA monetary policy.
During August, Futures markets have shown some exuberance for RBA rate cuts, following the Board's decision to leave the cash rate unchanged at the last meeting, and extending the current pause to three months.
Some of that rate cut pricing stemmed from the recent Global bond market rally. This was sourced in the US, following growth downgrades by the FOMC for the US economy for 2010. Weaker equity markets also helped fuel the rally, and Australia, with bond yields above 4.0% for both short and longer bonds, attracted buying from around the world.
Consequently three year bonds in Australia rallied from above 4.75% to around 4.25%, and lower than the RBA cash rate of 4.5%, and ten year bonds have improved from above 5.25% to around 4.75%, amid reports that Asian Central Banks have been strong buyers.
Shorter term futures interest rate futures contracts also rallied. The first four quarterly 90 day bank bill contracts, out to June 2011, are all trading lower in yield equivalents, and on approach to the RBA cash rate, an clear indictor of rate cut pricing. With the normal bank bill premium of 0.25% over cash, the August rally provided Trading banks a brief opportunity to lock in funding at 10 to 15bp over the RBA cash rate.
30 day cash rate contracts, which settle each month at the RBA cash rate, have moved sharply under the current cash rate, with later 2010 contracts extending at one point to price in a 0.25% rate cut by almost 50%. Now was stretching it too far, in my opinion.
Growth is clearly stronger, but there is no immediate inflationary threat.
As discussed previously, the RBA has only quarterly inflation figures to work on, and with the current policy rate of 4.5% and at about long term averages, there is an implication therefore that some aspect of economic activity needs to get out of wack, to prompt the RBA into a move.
The global uncertainty has been cited by the RBA as a cautionary situation and that appears as some offset to domestic economic strength.
The latest inflation outcome at 3.1%, just above the top of the RBA band, but within forecasts, was not an apparent concern at the August meeting, given that the Board left rates on hold after the inflation data was released.
The next quarterly inflation data is scheduled for release in late October and therefore only extraordinary circumstances before that data, should provoke the RBA to change the cash rate in either direction.
With global growth uncertainties outpaced by stronger domestic growth data, one appears to cancel the other as an agent provocateur for RBA policy change for the next few months.
Language in the RBA Statement could indicate approaching change.
The likelihood is that the RBA cash rate will remain unchanged throughout 2010.
Having now extended the pause to three consecutive months, the RBA is most likely to adopt a change in language before the next move. Current RBA language suggests
If the Board is concerned that the recent stronger data could lead to inflation pusher higher than expected, then they could choose to change their language and suggest that "the next move is likely to be an increase." or something similar, to signal their intent.
In late 2009 they said:
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....."the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy." extract form the 6 October 2009 RBA Statement.
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...."the Board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker." extract form the 3 November 2009 RBA Statement.
On the other hand if the Board continues with the view of the last three months that
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"the Board judged (views) this setting of monetary policy to be appropriate ( for the near term)" that would be conclusive that rates will remain on hold and the next and only hurdle is 3Q CPI data, to be released in late October.
It would need some serious increase in that Inflation data, to bring a November or December rate hike into play.
But rate cuts are not in serious contemplation for 2010.
With kind regards,
John Craig
Phone: (612) 8243 3526
Fax: (612) 9255 7492
Mobile:(61) (0) 416 96 7777
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