Curve Monthly Insights, July, 2015

Curve Monthly Insights

  • The RBA decided to leave the cash rate on hold at 2.00% and offered little in the way of insights into the outlook for the cash rate.
  • The local economy continues to grapple with the transition away from mining led growth.
  • Uncertainty in Greece and China dominated the headlines over the month.
  • The outlook for monetary policy still remains uncertain with much still hinging on global influences.

Rates Recap

  • The RBA elected to maintain the cash rate at 2.00%, in line with market expectationsMonthly Market Moves July 15
  • In the accompanying statement following the decision they gave away little in the way of new information despite a lot of uncertainty emanating from offshore.
  • The US interest rate curve continued to steepen with anticipation of the FOMC getting closer to raising their overnight cash rate pushing up longer rates while global uncertainties push short dated yields lower.
  • The market is still expecting this normalisation to get underway in the second half of 2015, most likely at the last FOMC meeting of the year.
  • This is very important for Australia as it will have a significant implication for our own setting of monetary policy.

Australian Economic Highlights

  • GDP grew by 0.9% in Q1, up from 0.5% in Q4. The annual pace was lower at 2.4% against expectations of 2.1%. The result suggests that momentum in the economy remains weak but is buoyed by a lower AUD.
  • CPI increased by 0.2% for the second straight quarter in Q1, which was just above market expectations of a 0.1% rise. The increase saw the annual rate decline further to 1.3% from 1.7% in Q4. The core rate once again remained more stable, rising by 0.6%, slightly above expectations with the annual rate edging higher to 2.40%.
  • Despite monthly volatility the employment data trend remained solid without being spectacular in June. Total employment rose by 7,300 with a swing towards full time jobs. The unemployment rate remained relatively steady at 6.0% even after a small increase in the participation rate.
  • Job Ads rebounded in June according to the ANZ Job Ads report with the rise of 1.3% while May’s initial flat result was revised up to 0.1%.
  • There was once again a divergence between Business and Consumer Surveys.  The NAB Business Conditions index pushing higher again in June, rising from 8 up to 10.  More importantly Business confidence also continued to improve, rising from 6 to 11.
  • Consumer confidence declined sharply in June, falling by 6.9% to 95.3 in June from 102.4 in May.  The outlook for the economy continues to weigh on confidence with a result below 100 points indicating pessimists outnumber optimists.
  • The pace of retail sales growth returned in May, rising 0.3% which was a bit short of expectations, while the flat result from May was revised down to show a fall of 0.1%. Growth in sales for the quarter ex inflation were once again positive, albeit a little slower at 0.7% for Q1 against a rise of 1.5% in Q4 last year.
  • Housing finance plummeted in May with the number of owner-occupier loans down 6.1%, more than doubling the decline expected. The value of occupier loans fell 5.3% while the value of investor loans declined by 3.2%.
  • The steady growth in the RBA’s credit aggregates continued in May with lending to investors still growing much faster than owner occupiers. The annual rate of growth held steady at 6.2%.
  • The pace of house price appreciation continued to moderate in Q1, with total capital city prices up 1.6%, short of the 2.0% increase the was expected. The annual pace also fell short of expectations, coming in at 6.9% against 7.4% expected.
  • Australia’s trade deficit improved after last months record high, which was actually revised even higher from $3.9bln to $4.1bln. May’s trade balance eased back to levels we have become more accustomed to, printing at $2.75bln.
  • Building approvals continue to jump around, this time rising by 2.4% in May with Aprils decline of 4.4% revised down to a 5.2% fall.
  • Motor vehicle sales eased back in May with a decline 0f 1.3%. Despite the fall, sales still remained positive for the past 12 months by 0.8%.

Global Uncertainties 

Another month has passed and it has largely been more of the same as far as Australia’s economic performance is concerned. The economy is still one that is reluctant to embrace the transition towards more traditional growth drivers. There are still signs emerging that suggest the transition is coming albeit a little slower and less widespread than the RBA would like.

Making the transition all the more urgent is not only the accelerating pace of decline in Mining’s contribution to growth but rising global uncertainties. The past month has seen a number of global uncertainties come to a head which all have implications for the fortunes of the Australian economy.

The Greek debt situation, which once again became a game of brinksmanship of epic proportions, is finally moving forward after an 11th hour agreement. It’s a deal which comes with €86bln in aid for Greece on the basis that they agree to spending cuts, pension and tax reform, administrative reform and heavy oversight from Chinese Share Market Collapsethe EU during the period of the agreement. The situation in Greece, while having long term implication for the future of the Eurozone, is likely to have more of an indirect impact on Australia compared to the direct impact that situation in China is likely to have. The recent collapse in the Chinese share market, which only halted after Chinese officials threw everything but the kitchen sink at it to prop it up, has far more serious implications. Before the intervention from Chinese officials, the Chinese Composite index fell almost 35% from its high in just 17 trading sessions. The collapse in the share market spilled over into other markets, including commodities, with iron ore briefly being pushed to a new post GFC low. The renewed pressure on the price of iron ore not only impacts the contribution of exports to final GDP but has a significant impact on the Federal budget.

These uncertainties are just providing further headwinds to the economy that is already grappling with the challenges of making the transition away from mining led growth.

Outlook for Interest Rates

According to the most recent statement from the RBA’s July Board meeting, very little has changed as far as the outlook for interest rates is concerned. The statement continued to state that the RBA is in wait and see mode, interpreting the incoming data in light of their most recent rate cut in May. It is likely that if the RBA would have met today, compared to a week ago, they would have had a little more to say on the evolving situations in Greece and China. While there is no real debate that these two situations are having and will continue to have an impact on Australia, the biggest global uncertainty we face is the actions of the FOMC.

Every month there are a number of factors that go into the RBA’s monetary policy decision. The RBA has repeatedly indicated it is reaching its limitations on how Outlook for interest rates July 15much it can do to support the economy. This has meant that they continue to look to the AUD to do the heavy lifting in easing monetary policy further, rather than being forced to lower the cash rate. This is where the timing of the FOMC’s decision to raise rates is all the more important. It is likely to be one of, if not the, most important factor that the RBA is considering when deciding on monetary policy at present. 

On Friday night, FOMC President Janet Yellen reinforced her assessment, that the conditions were still present for the FOMC to raise rates by the end of the year. Yellen appeared undeterred by the uncertainty in Europe and China and is still committed to following through on the FOMC’s long help plan to normalise interest rates. This would help the RBA as it, all other things being equal, would result in the USD rising, placing downward pressure on the AUD, leaving the overall setting of monetary policy lower without the RBA having to lower the cash rate.

While the European and Chinese uncertainty has not deterred Yellen, it has got the market a little more circumspect with many now expecting the first rate hike in December at the earliest, with the rest now expecting in 2016. If the risks in Greece and China subside and Yellen sticks to her word, then the case for any further cuts from the RBA would be the likely outcome. That would sit in line with current market pricing which currently doesn’t have another cut fully priced in. Should the risks in Greece and China result in more adverse outcomes for the global and local economy, resulting in Yellen postponing the first rate hike till well into 2016, then the RBA could have little choice than to move again if the economy fails to make any further progress on its transition away from mining led growth.