Key insights from the week that was.
It has been a quiet week for data, leaving the market to focus on whispers around the possible US-China phase one trade deal as well as central bank communications.
From the RBA, the November meeting minutes confirmed that, while the Board has a clear easing bias, for the time being they are in monitoring mode. Westpac continues to see a 25bp cut to 0.50% in February after which a move to unconventional monetary policy seems probable as Australian activity growth remains below trend and slack continues to build in our labour market.
One of the prime reasons we continue to put forward 0.50% as the effective lower bound for rates in Australia is their impact on confidence. As we highlighted last week, the Westpac-M Consumer Sentiment index has suffered multiple adverse reactions to the 2020 rate cuts and, at November, the downtrend for sentiment remains in place. In the current minutes, the RBA recognised “the negative effects of lower interest rates on savers and confidence” and that “a further reduction in interest rates could have a different effect on confidence than in the past”.
While the Board was informed by RBA staff that it appears banks still have adequate scope to pass on future rate cuts – providing an income boost to households – leveraged consumers have to be willing to spend this benefit. Anecdotes suggest this is not the case, with loan pre-payments instead rising. Meanwhile lower rates are reducing savers incomes and/or pushing them to put capital at risk in pursuit of offsetting returns.
On unconventional monetary policy, there was no new information in the minutes, but Governor Lowe is due to speak on the topic next week.
We also got an update this week on the fiscal policy outlook from Prime Minister Morrison and Treasurer Frydenberg. Morrison warned “a panicked reaction to contemporary challenges… would amount to a serious misdiagnosis of our economic situation”, and noted that “against this backdrop, it would be reckless to discard the disciplined policy framework”. In short, the Government remains committed to its goal for a budget surplus in 2019/20. Notwithstanding that, Morrison announced that $3.8bn of infrastructure spending is now being brought forward into the next four years with $1.8bn of that to be spent in this financial year and the next.
In our view, Australia needs fiscal policy to complement monetary policy to boost domestic demand. We believe there is scope for the government to boost domestic demand by bringing forward the legislated personal income tax cuts to 2020/21 through a phased in approach while providing adequate protection to its surplus strategy – as set out by Chief Economist Bill Evans a few weeks back.
Across in New Zealand, following the RBNZ’s surprise on-hold decision last week, our New Zealand team has released their latest quarterly Economic Overview. While the economy’s slowdown intensified in the September quarter, NZ Chief Economist Dominick Stephens highlights that recent data tentatively imply the worst is behind New Zealand. One more cut is expected from the RBNZ in February, but this will principally be owing to enduring global uncertainty. The NZ economy is meanwhile expected to strengthen aided in particular by gains in the housing market.
Turning to the US, the FOMC’s October meeting minutes were a repeat of the decision statement and follow-up testimony to Congress by Chair Powell. Of prime significance for the December meeting, FOMC confidence in the core of the US economy, the consumer, remains strong. The October cut was, at least in part, to protect the US economy against downside risks from the global environment. Having cut three times in 2020, and with global risks having receded somewhat, the Committee feel they have done enough to insulate the US and can now pause to assess.
While we see the FOMC on hold in December, come 2020 a further deterioration in US consumption growth will be cause for the FOMC to cut three more times to 0.875% by September. Persistent global uncertainty will also justify this course, as trade tensions linger and global growth remains soft.