– DECEMBER 2016 INSIGHTS BY THE CURVE TEAM –
- The RBA left the cash rate on hold again in December at 1.50% after cutting by 0.25% in May and August.
- The Q3 GDP shocker will have an impact on the RBA’s forecasts and outlook for monetary policy.
- Markets moves over the past month have been significant as the globe continues to reassess the outlook under a Trump led US economy.
- Further monetary policy divergence is expected as the ECB extends its QE program ahead of a likely hike from the FOMC this week.
What a Year
The best way to describe the year that have we seen is you really needed to “Expect the unexpected, expect the extreme!”
The year started off with panic across markets and the fear of deflation was tightening its grip. The FOMC had just raised interest rates for the first time in a decade and it sent the market into a tailspin. Add to that the abrupt decline in commodity prices and the market was starting to price in the worst. We had the most volatile start to the year in recent memory.
The market eventually calmed down and the focus on the economic outlook came to the fore. However, the more unexpected events and extreme responses were still ahead of us. The RBA was alert but not alarmed at the situation at the start of the year and openly stated that if needed, it had room to provide more accommodation to the setting of monetary policy if required. While the market wasn’t really expecting it at the start of the year, by April it was getting pretty clear the RBA would indeed act.
After a rate cut in May we got yet another unexpected event. The Brexit vote, which seemed more of a non-event the closer it got, turned out to be anything but. The decision by the British people to leave the EU sent another shockwave around markets with wild swings, especially for the British Pound. It also reaffirmed the risk of populist politics with the centre rising up after years of dismay and fed up with the lack of progress from incumbent governments. A similar tone was evident in Australia’s own election a week later.
Not long after the dust settled from the Brexit calamity for markets, the RBA stayed true to form, delivering a second rate cut taking the cash rate to a new low of 1.50%. The main driver behind the decision to cut rates to a new low was an unexpectedly low read on inflation and an outlook that saw little prospect for a significant pick up in the medium term.
Only a few month later we got the latest in the run of unexpected outcomes. Donald Trump pulled off what most deemed impossible and stormed home to win the race for the White House in the US Presidential Election. Rather than widespread chaos as many expected, if Trump won, the result was actually well received. Since his election, Trump has surrounded himself with a host of very capable people and if he can keep it together, he may just be what the US economy needs to shock it out of its decade long slumber.
The year ahead is poised to be equally unpredictable with no shortage of challenges. There will be plenty of political hurdles to jump, especially in Europe. The outlook for Italy, the 6th biggest issuer of sovereign debt in the world is clouded after its failed referendum. France heads to the polls in the first half of the year where there is a risk the far right could get up and follow through on putting forward a “Frexit” vote. Donald Trump will also take the reigns of government on January 20 and the market will be expecting an immediate impact.
Economically there will be plenty of challenges. The Brexit process will get under way with the EU, while Europe will continue to be plagued by its debt problem. Japan continues to try to jolt its economy out of a 30 year slumber while our biggest trading parter, China attempts the biggest economic transition ever attempted.
Australian Economic Highlights
- Growth disappointed across the board in Q3 with GDP falling by 0.5% for the quarter. The sharp fall which saw most components of growth fall, saw the annual rate decline significantly from 3.1% to 1.8%, well below the RBA’s forecasts.
- CPI was a little mixed in Q3. Headline inflation was up 0.7% ahead of expectations of 0.5% which saw the annual rate lift from 1.0% to 1.3%. The RBA’s preferred measure, core inflation, just missed expectations, rising by 0.35% which saw the annual rate edge lower by 0.1% to 1.5%.
- The employment data still soft in October but managed to break the trend of declining jobs growth. Full time employment rose by 41,500 whilst part time employment fell by 31,700 for a net gain of 9,800. The unemployment rate remained unchanged at 5.6% as did the participation rate at a revised 64.4%.
- ANZ job ads were positive again in November, positing a gain of 1.7%, adding to the gain of 1.0% in October.
- NAB business conditions continued to slide in November with the index dropping a further 2 points to 5 which is its long run average. Business confidence continues to largely trend sideway, printing at 5 as well in November. The downtrend in conditions and the subdued outlook has NAB calling for 2 more rate cuts next year.
- Consumer confidence continued to print above the key 100 level in November despite slipping 1.1%. The broad based decline which saw all but one sub index fall saw the index ease to 101.3 with optimists still marginally outweighing pessimists.
- The rebound in Retail sales continued for a third month in October with total sales growing by 0.5%. The improvement over the past few months will be needed to continue to help growth rebound from the disappointing result in Q3.
- Housing finance was softer in again in October. The number of owner-occupier loans were down 0.8% with the value of occupier loans also falling 0.8% while investor lending managed a small gain, up 0.7%.
- Australia’s trade deficit reversed its recent trend and widened in October. The deficit printed at $1.541 billion which was much wider than the expected $610 million deficit expected.
- The huge slide in Building approvals continued in October with the 12.5% fall adding to the 8.7% decline in September. The October reading has resulted in the annual rate of building approvals falling 25% from a year ago suggesting construction growth going forward will be limited.
- Motor vehicle sales struggled to maintain momentum in October, falling 2.4% after rising the same amount the previous month. Despite the fall, the annual rate of growth lifted 0.4% to 1.2%.