Key insights from the two weeks that were (special holiday edition).
In the past two weeks, the RBA minutes framed the conversation on rate cuts while the labour force and CPI data added fuel to the debate. Offshore, a steady China Q1 GDP result indicated policy stimulus is starting to take effect, offering some encouragement against the weak manufacturing conditions in key trading partners.
The April RBA meeting minutes clearly communicated that the Reserve Bank are willing to cut the cash rate if necessary and have set out the conditions for a cut to occur.
In the final section of the minutes, the Board reaffirmed their belief in the stimulatory effect of lower interest rates on the economy via the cash-flow and exchange rate channels. That discounts arguments that suggest there is little benefit from lowering rates further from the already low starting level. In accordance, the Board set out the conditions for a rate cut, “members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances”.
Given that we have seen conflicting signals from weak GDP growth against strength in the labour market, it would appear that the Board is placing a greater weight on employment from a policy perspective. As we see the labour market as a lagging indicator, we expect slow growth will eventually weigh on employment growth.
In that regard, the ABS March labour force and Q1 CPI releases provided timely updates.
As at March, the labour force remains strong, total employment up 25.7k, beating the market median estimate of 15k. The three month average is now 24k, from 22k in February, indicative of a robust trend in the labour market so far in 2019. Six month annualised employment is 2.5% and the trend unemployment rate has held at 5 per cent.
The CPI, on the other hand, was flat in the March Quarter compared to the market median of 0.2% and Westpac’s 0.1%. The annual rate eased back to 1.3%yr from 1.8%yr in Q4. The average of the core measures rose 0.2%qtr, below market (0.4%) and Westpac (0.3%) expectations – a low for the series, matching the outcomes in March 2016 and September 1997. Incorporating revisions, the six month annualised growth in core inflation is now just 1.2%yr, well below the bottom of the RBA target band and the slowest pace since December 1997.
Overall, the CPI data confirmed that well below target inflation provides the RBA reason to cut the cash rate while the labour force data tempers an absolute reaction. There are still three labour force releases before the August RBA meeting – ample time for our expected weakening in the labour market to materialise. On this basis, along with inflation remaining low and below trend economic growth, we continue to forecast cash rate cuts in August and November.
Similarly across the Tasman, NZ Q1 CPI fell slightly short of expectations, up 0.1% against the consensus +0.2%. The surprise came from a weaker read on tradables, down 1.3% in the quarter and 0.4% in annual terms. Indeed, the major driver of the slowing in annual inflation to 1.5% from 1.9% was due to the pullback in fuel. Nevertheless, core inflation remains subdued with the various measures largely in a range of 1.5-1.7%.
After the release, market pricing shifted to a better than even chance of an OCR cut at the May Monetary Policy Statement. That concurs with our view for a cut at that meeting. But as RBNZ Governor Adrian Orr has emphasised in recent interviews, the outcome of the May review is far from settled. Next week’s labour market data release is critical.
Offshore, China’s Q1 GDP release provided some optimism amidst softness seen in much of the global economy, while partial indicators in the US showed their economy regained some momentum in recent months.
In the lead-up to China’s Q1 GDP release on 17 April, the consensus expectation was for a slowing in the annual pace to 6.3% from 6.4% after the authorities opted for a growth target range of 6.0-6.5% for 2019 compared to the previous year’s target of 6.5%. Instead, growth printed at 6.4% and the March partial data signalled momentum picked up – retail sales 8.7% vs exp. 8.4%, industrial production 8.5% vs exp. 5.9%, and fixed asset investment 6.3% vs exp. 6.3%.
In contrast, softness in China’s major trade partners endures. This was highlighted by this week’s South Korea GDP release reporting a 0.3% contraction in Q1 led by a sharp drop in investment. That is indicative of the broader global manufacturing slowdown with the preliminary estimate of Europe’s manufacturing PMI confirming weakness over there has persisted into the start of Q2. Europe’s saving grace has been a resilient services sector, and the consensus expectation for next week’s Q1 GDP 1st estimate sees the economy avoiding contraction, but nevertheless recording only a modest growth outcome of 0.3%.
Lastly to the US, the last two weeks of data have been positive, with strength seen in retail sales and durable goods orders.
Retail sales jumped 1.6% in March with the control group up 1.0%. Gains were seen across twelve of the thirteen categories with vehicle sales particularly standing out at +3.1%. This was backed up by durable goods orders also showing strength in the month, lifting 2.7% following a 1.1% decline in February – choppiness driven by the volatile aircraft component. While core capital goods shipments declined 0.2% in March, still indicating a soft business investment outcome in Q1, orders rose 1.3%.
The overall result indicates the consumer regained its footing after softness seen at the turn of the year while business investment is likely to pick up in the start of Q2. Tonight’s Q1 GDP 1st estimate is still likely to point to solid growth – the consensus expectation centres on a 2.3% annualised pace while the Atlanta Fed’s nowcast is 2.7%.