– FEBRUARY 2019 INSIGHTS BY THE CURVE TEAM –
- The RBA left the cash rate on hold again in February, marking 30 months the cash rate has remained at 1.50%.
- According to the latest from the RBA, they now see the risks to the outlook as being more balanced, with the next move in the cash rate just as likely to be up or down.
- However, the market pricing suggests there is greater downside risks, with long term yields falling sharply again over the past month leaving the curve even flatter.
- In fact, following the RBA’s “balanced outlook” statement, the chance of a rate cut by the end of 2019 jumped and is now nearly fully priced in.
- Short term rates have dipped a little over the month as funding pressures appear to have eased slightly as we move further away from the December year end squeeze.
- There’s also been a shift in the US monetary policy outlook as the Fed puts their rate hike campaign on pause.
- This pause is largely due to fears of a global slowdown which have caused the FOMC to adopt a “wait-and-see approach”, even in the face of strong domestic data.
Australian Economic Highlights
- Growth disappointed in the third quarter with the 0.3% increase only half what was expected. The annual rate slipped to 2.8% while the previous quarter’s 3.4% rate was revised down to 3.1%. The RBA downgraded their forecast for growth in 2019 down from 3.5% to 3%.
- CPI slightly exceeded expectations in Q4 with headline inflation rising 0.5% while core inflation rose 0.4%, in line with expectations. The annual rate of headline inflation inched further below the RBA’s target band to 1.8%, while the core annual rate stayed at 1.75%.
- The employment data continues to post interesting outcomes. Jobs growth bounced back in December with jobs growth of 21,600. It edged the unemployment rate down 0.1% to 5% as the participation rate dropped slightly.
- The ANZ job ads suggests that jobs growth will slow down over the months ahead as new ads fell 1.7% over January. Total jobs ads have now been trending down for 8 months
- Business confidence edged up from 3 to 4 over January, but still remains below its long run average while business conditions rebounded to 7 after capitulating in December. The employment index remains solid edging up from 4 to 5, staying above long run averages.
- Consumer confidence declined from December with all sub-indicies falling in January. The headline index was down 4.7% to 99.6, indicating the number of pessimists now outnumber optimists.
- Retail sales fell 0.4% in December, undershooting expectations. The sharp decline is partly a result of sales being pulled forward in November which saw a 0.4% increase in retail sales.
- The downward trend in housing finance continued with weak figures in December. The value of lending to households fell 4.4% and the value of lending to businesses dropped sharply by 9.7%.
- Australia’s trade surplus surged in December to $3.7 bln; however, there may be cause for concern as imports fell 6%, potentially indicating a slowdown in aggregate demand. Net exports are also likely to detract from growth with the increase in exports coming via higher prices rather than increased volumes.
- Building approvals sharply declined for the second consecutive month with approvals collapsing 8.4% in December. With this figure now down 40% from its’ peak, it is clear the construction sector is quickly cooling down.