Daily Commentary BY THE CURVE TEAM –

FOMC Surprises Market, RBA Set to Release Latest Update

9th of November, 2018

The FOMC statement following their meeting confirmed more hikes ahead but it was what the Fed didn’t say that surprised markets. The RBA could well do the same thing in their Quarterly Statement of Monetary Policy should they once again fail to mention the elephant in the room.

Further tightening from the FOMC is coming with December the next likely move before we get live meetings every six weeks next year. The statement released by the FOMC following their meeting was little changed from the previous month, confirming the status quo for the outlook. That puts Decembers as close to a done deal with two more early in 2019 still highly likely.

It was what the FOMC didn’t say which got the markets attention and saw some late moves in markets. The FOMC made no mention of the spike in volatility and equity market falls. As they have been making clear, it is going to take more than a little volatility to get their attention and that suggests they are unlikely to rush to the rescue should markets keep falling.

Today it is the RBA’s turn with their Quarterly Statement on Monetary policy due out at 11:30. They have largely told us what to expect via the statement that followed their board meeting earlier this week.

Growth forecasts have been revised up a touch. They have also revised their unemployment expectations with the unemployment rate now expected to fall to 4.75% by 2020. They will likely reaffirm their inflation forecasts off a lower base following the latest update a week a go with core inflation still expected to drift back up into the target band over the forecast period.

What the market will be looking for is more colour on the risk to consumption driven by the deterioration of the housing market.  I outlined in Wednesday’s Daily Commentary why the RBA is unlikely to rush to change their rhetoric. It doesn’t mean the market won’t be looking for it.

The Australian construction PMI from earlier in the week, house price data and clearance rates all point to more downside ahead. It won’t be until we see signs of a deterioration in consumption and a labour market softening before the RBA makes any changes to their central outlook.

We get a additional important data point in the form of new credit approvals this morning. Investor credit has been falling for some time but the previous month showed owner occupiers also pulling back. This is important because where new credit approvals go, so do house prices so keep an eye out for this number.

David Flanagan

Director - Interest Rate Markets