Daily Commentary BY THE CURVE TEAM –

Markets Mixed Ahead of Key Data

21st of February, 2018

It was a mixed night for markets as the US came back online after the Presidents Holiday break ahead of some key data today. While there were no surprises in yesterday’s RBA minutes, they did reinforce that the outlook largely hinges on one key data point that is due today.

After the wild moves to start the month, markets are struggling to find direction in the aftermath, with a number of mixed moved overnight. The USD continued to fights its way back up off the canvas with it stronger against most other major currencies overnight including the AUD. All three of the major US equities indices closed lower led by the Dow, after disappoinings earnings from Walmart.

The focus remains firmly on the bond market. The huge amount of issuance from the US Treasury was digested by the market without too much trouble. Bond yields were a touch higher early in the session before drifting off their highs. The US 10’s have been tightly bound in a range for the past few days and where they go next holds the key to the short term outlook for a number of markets.

It sets up an interesting day locally where the latest wage data in Australia is due out. There will be plenty of focus on the outcome today and the RBA continues to point to wage growth as the key to the outlook for the economy and monetary policy.

In yesterday’s minutes to their February board meeting, the RBA’s message remained clear. They expect growth to pick up over the forecast period. This pick up in growth is expected to be driven by a pick up in consumption as wages start to rise. Continued employment growth is expected to slowly eat into the slack in the labour market, leading to that wage growth. This is then expected to lift inflation back to the target band.

All sounds pretty straight forward.

The thing that caught my eye though from the minutes was the fact that they said:

“The unemployment rate was expected to decline a little further over this period to 5¼ per cent, consistent with GDP growth rising to be above potential. This implied that some spare capacity in the labour market would remain over the forecast period, but members noted that it was uncertain how much spare capacity existed and how quickly it might be eroded.” 

It is this uncertainty that remains the biggest concern for the RBA and their corresponding confidence in the outlook. If what we have seen globally is a sign of what we might expect in Australia, the non-accelerating inflation rate of unemployment (NAIRU) could be lower than previously has been the case.

This puts increasing focus on wage growth. The fact that despite a falling unemployment rate, the RBA still expects slack in the labour market over the forecasts period,  implies that it doesn’t expect wage growth to come roaring back in a hurry. That is why they continually mention the word “gradual” when referring to a number of the moving parts in their forecasts, such as the return of inflation to the target band.

So while the immediate focus in on today’s wage number, it is really about where wages head over the quarters ahead that matters most for the economic and monetary policy outlook.

David Flanagan

Director - Interest Rate Markets