Curve Monthly Insights, April 2015

Curve Monthly Insights

  • The RBA surprised the market again, electing to leave the cash rate at 2.25% in April.
  • Consumer confidence remains weak as the government prepares to release the budget.
  • Government revenues eroded by the fall in commodity prices to make surplus difficult.
  • Despite the RBA leaving the cash rate on hold in April, they are still open to further cuts.

Rates RecapKey Market Moves - April 2015

  • The RBA continues to keep the market on their toes, once again electing to keep the cash rate on hold at their April Board meeting.
  • In the accompanying statement, Governor Stevens continued to suggest that more easing could be appropriate and such actions will be assessed over forthcoming meetings.
  • The RBA continues to be disappointed in the levitation of the AUD, which actually finished the month higher despite commodity prices, especially iron ore falling heavily.
  • The Australian yield curve has flattened a little over the past month as the yields in the long end have fallen further than short end yields, suggesting rates could stay lower for longer.
  • The US interest rate curve has also flattened over the past month, as the market continues to predict that the FOMC could take longer to raise rates than was first anticipated, with some suggesting it could take till 2016

Australian Economic Highlights

  • GDP grew by 0.5% in Q4, up from 0.3% in Q3 against expectations of a 0.6% rise. The annual pace was lower at 2.5%. The result suggests that momentum in the economy remains weak.
  • CPI increased by 0.2% in Q4, just below market expectations, with the annual rate falling 0.6% to 1.7%. The core rate also rose 0.7%, above expectations with the annual rate easing to 2.25%.
  • The employment data improved in February with the unemployment rate easing to 6.4%. Total employment rose 15,600, mostly full time, while the participation rate eased from 64.7% to 64.6%.
  • ANZ Job Ads unexpectedly fell by 1.4% in March, the first drop in almost 12 months.
  • The NAB Business Conditions index improved from 2 to 6 in March. More importantly Business confidence bounced back, climbing out of negative territory, back up to 3 ahead.
  • Consumer confidence fell back below 100 in March with pessimists outweighing optimists once again. The overall index dropped back to 99.5, from a 12 month high of 100.7 in March.
  • Retail Sales continued their solid run, rising 0.7% in February. Retail sales for Q4 ex inflation still managed to beat expectations rising 1.5% ahead of expectations of a 1.1% rise.
  • Housing finance was mixed in February with the number of owner-occupier loans up 1.2%. The value of occupier loans also rose 0.5% while the value of investor loans declined by 3.4%.
  • The RBA’s credit aggregates continued to grow in February with lending to investors still growing much faster than owner occupiers. The 0.5% monthly rise saw the annual rate edge up to 6.2%.
  • House prices was driven largely drive by the Sydney housing market, with total capital city prices up 1.9% in Q4, 0.1% above expectations. The annual pace eased from 9.0% to 7.1%.
  • Australia’s trade deficit widened further in February, rising to $1,256m against expectations of a $1,300m deficit. Despite ongoing deficits, net exports were still the biggest contributor to GDP in Q4.
  • Building approvals remained volatile, sliding 3.2% in February against expectations of a 4% fall. Medium density or apartment approvals continue to drive the overall result, falling by 6.6%.
  • Motor vehicle sales jumped in February, rising 2.9% and are now 4.1% higher over the past year.

What it all Means – Crunch Time for ConfidenceAus Consumer Confidence

It has been just over two months now since the RBA lowered the cash rate to 2.25% and we are yet to see a material impact, nor should we. As far as the data is concerned it can take up to nine months from when monetary policy is adjusted for it to filter through to real economic outcomes. The same cannot be said for confidence, which can be instantly measured at any given point.

Confidence amongst consumers remains weak on both the major measures. The ANZ-Roy Morgan weekly index continues to trend lower. The Westpac survey paints a similar picture with pessimists once against outweighing optimists despite a brief reprieve when optimists got the upper hand following the February rate cut. It is a similar story for business confidence which fell into negative territory in February for the first time in 18 months, before recovering in March.

Iron Ore Decline - April 2015With the RBA doing all it can in order to foster growth in demand and keep inflation consistent with the target, it needs help from fiscal policy to help boost confidence. How the government can do this given their current situation will prove interesting. Set to hand down their second budget, the government faces dwindling revenues, largely due to the collapse in the iron ore price that we have witnessed over the past 15 months. The price of iron ore is now down over 75% from its February 2011 and 66% since the start of 2014. Should the government have to deliver another budget with aggressive measures to get the budget headed back to surplus then confidence will come under further pressure. Hopefully last year’s budget did enough of the heavy lifting so this year’s won’t be as unpalatable.

The Outlook for Interest Rates

Markets Expect Further CutsWhen the RBA cut the cash rate back in February, they did so under the assumption of market pricing at the time, which at the time had two interest rate cuts fully priced in for 2015. This was outlined in the subsequent statement on monetary policy.  This means that ever since then, the market has been expecting at least one more cut from the RBA. With the RBA Board electing to hold rates at the subsequent meetings, it has thrown an element of doubt over the timing of the next move. This has been reflected in market pricing which has eased back since the decision to hold the cash rate steady this month. If the RBA is to make a further adjustment by cutting the cash rate to 2.00%, then May is as good a time as any. They will have the inflation reading for Q1 which will be released on the 22nd of April and will also be able to update their longer term view in the statement on monetary policy – due out the Friday after the May meeting. Another budget shock would all but guarentee another cut. One risk is, the RBA’s efforts to lower the currency through monetary policy adjustments has been less that successful. This could see them hold off for another quarter in the hope that the FOMC moves to nomalise rates, as many suggest, in June. This would narrow the interest rate spread and drive the AUD lower helping to offset the fall in commodity prices.