Key insights from the week that was.
In a week where top-tier domestic data was absent, the RBA’s April meeting was the focus for watchers of the Australian economy.
Despite February’s drop in the unemployment rate from 6.3% to 5.8%, the RBA continues to see “considerable spare capacity and [an] unemployment [rate that] is still too high”. The discussion of house prices was also little changed in April despite a further acceleration in price growth. For the RBA, the focus remains on lending standards versus the level or growth rate of prices.
Regarding monetary policy, the RBA remains committed to its 3-year yield target. It will decide whether to extend this program by targeting the November 2024 bond (currently April 2024) later in the year.
As outlined by Chief Economist Bill Evans after the RBA meeting, we anticipate this extension to occur as the RBA believe it will be 2024 “at the earliest” before an increase in the cash rate is justified. On asset purchases, the RBA being willing to “undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation” as stated in April rather than merely “if necessary” in March further signals the Bank’s commitment to achieve its aims for the economy.
Chief Economist Bill Evans also recently outlined that we now believe a third $100bn asset purchase program will follow the second which is just beginning and should run to late August. However, purchases from September under this third program are likely to be undertaken at a slower pace of $4bn a week (currently $5bn) to extend the program to March 2022. A smaller $50bn program is then expected into the second half of 2022 as the RBA begin to normalise policy settings.
Data and events outside of Australia this week continued to focus attention on the US’ strength. Following last week’s stellar US nonfarm payrolls report, which reported almost 1.1mn new jobs at March if revisions to January and February are included, and a 37-year high for the ISM manufacturing survey, this week: the ISM non-manufacturing PMI printed at an all-time high; the IMF revised up their growth expectations for the US and world; and the FOMC minutes from the March meeting showed the Committee is very pleased with progress to date.
Nonetheless, also clear in the March minutes and in subsequent remarks by Chair Powell at an IMF event is that the US still faces a long road to a full recovery. Policy therefore will have to remain extraordinarily accommodative until further significant progress is seen. Of note on jobs, Chair Powell commented at the IMF event that “a string” of outcomes like March are necessary before a tapering of asset purchases could be considered given employment remains 8.4mn below its pre-pandemic level.
Moreover, in his overnight remarks and the FOMC’s recent communications, concern over how long it will take to erode this slack was clear. Indeed, an unemployment rate near prior estimates of ‘full employment’ is not expected by the Committee until the end of 2023. So, not only is it unlikely that the FOMC will taper before mid-2022, but rate hikes are expected to remain off the agenda until 2024, as the FOMC’s March median expectation attests.
In terms of the risks to this view, while the FOMC are watchful on economic momentum and inflation, they arguably see as great a potential risk to the economy from financial conditions if inflation expectations were to jolt higher from here and take nominal term interest rates with them. Committee members therefore continue to emphasise they see the inflation upswing of mid/ late-2021 as transitory and also, from a structural perspective, are cognisant of the difficulty the US has experienced trying to get inflation sustainably to target ever since the GFC.