Daily Commentary BY THE CURVE TEAM –

Market Malaise Ahead of RBA Day

6th of February, 2018

It was a wild ride again for markets overnight. The Dow in the US dropped over 1000 points before bouncing 800, all in the space of 15 minutes. Bonds rallied later on leaving yields lower, while the USD was stronger. Headlines locally will be all about the overnight price action where you can read all about it, I will take a close look at today’s RBA meeting and how it might play out.

The RBA Board is scheduled to meet today and after the usual hiatus during January, it is the first real update we will have had since December’s meeting. With market pricing suggesting no chance of a rate change at this meeting, the focus will be clearly on what the RBA says and how they have interpreted data and events over the past two months.

Not only does market pricing suggest no hike at this meeting, after the softer than expected inflation reading last week, expectations have been pushed out from November this year to February 2019. That means the market will be hanging on every subtle word change and what that may mean for the outlook for the economy, inflation and the cash rate.

So what has changed since the RBA last met?

The economic outlook remains on sound footing with the Nab’s monthly business survey confirming that business conditions and confidence remain solid as we enter 2018.

The employment market remains solid with the latest figures confirming that Australia enjoyed its best calendar year of jobs growth on record with more than 400,000 new jobs. However, the increase in employment only slightly outpaced the growth in the labour force meaning there is still some slack in the labour force. There are some signs that the underemployment rate is turning down which bodes well for wages.

One of the big positives has been the back to back lift in consumer confidence in December and January thanks to the improved economic outlook. While the lift in the overall index will be welcomed by the RBA, I’m sure they would like to see a more sustained lift in the family finances sub indices to help support the outlook for consumption.

Last week’s inflation data for Q4 would have been disappointing. Not only because the offical headline and core readings are still sitting below the target band but because of the lack of price pressure evident across discretionary categories.

Despite the recent volatility in global financial markets, the global economic outlook will remain a positive back drop for the time being. Should the recent volatility become more engrained it could start to impact confidence and the outlook.

Finally, the other big change has been the currency. Even after pulling back from its recent high just over week ago, the currency is still up 4 cents since December. One constant in RBA statements, stretching back to their second last rate cut in May of 2016, has been repeated warnings over a rising currency. That is something that will weigh on the minds of the RBA when it comes time to eventually signal a shift in the outlook.

What we are likely to see from the RBA later today is a continuation of their cautiously optimistic outlook. We could seem some subtle shifts in the wording around the outlook for growth and employment while concerns over the consumer, inflation and the impact of a rising AUD is likely to offset that improved optimism.

Over the long run, wages still hold the key where monetary policy goes.

David Flanagan

Director - Interest Rate Markets