Key insights from the week that was.
Monetary policy remained centre stage across the world this week, but particularly in Australia as the RBA Review and April Board meeting minutes were released.
The April RBA meeting minutes highlight the Board’s preference for optionality. As detailed by Chief Economist Bill Evans, the “case for an increase is much stronger than was the case for the April meeting”, with the Board members noting: “the forecasts produced by the staff in February had inflation returning to target range only by mid-2025 and that it would be inconsistent with the Board’s mandate for it to tolerate a slower return to target”; these “forecasts were conditioned on monetary policy being tightened a little further”. The Board also raised some new risks, in particular: that the current strength in population growth “could put significant pressure on Australia’s existing capital stock, especially housing, which would in turn manifest in higher consumer prices”; and there was “increased risk of larger wage increases in parts of the economy, including the public sector”. Also critical to the decision in May will be next week’s Q1 CPI report. Westpac remains of the view that, while moderating, another high annual inflation print in Q1 warrants one further 25bp hike in May to 3.85% after which the cash rate will be left on hold until early-2024 to quell lingering risks.
Subsequent to the minutes, the Government commissioned RBA Review was publicly released and commented on by RBA Governor Lowe. ‘An RBA fit for the Future’ “analyses the RBA’s performance over the past 30 years and makes recommendations on the monetary policy framework, governance, leadership and culture of the RBA”. Many of the recommendations are significant, albeit with the detail and timing still to be worked through. Chief Economist Bill Evans’ note discusses the implications for policy setting.
Ahead of Australia’s Q1 CPI next week, New Zealand’s latest update (pleasingly) disappointed market and RBNZ expectations for a second-consecutive quarter, printing at 1.2%, 6.7%yr (from 7.2%yr at December). Individual items showed considerable volatility. But measures of underlying momentum steadied or eased back in Q1. Our NZ economics team remains of the view that inflation won’t be back below 3.0%yr until the second half of 2024. The RBNZ is therefore seen hiking by 25bps at the May meeting to a cycle peak of 5.50% to be held until mid-2024.
Of the data from further afield, China’s Q1 GDP release and associated partial data was most significant. At 2.2%, the Q1 gain was strong but broadly in line with expectations. However, Q4 2022’s outcome was revised up from 0.0% to 0.6%, seeing the annual rate at 4.5%yr at March 2023 versus the market’s expectation of 4.0%. We remain of the view that GDP growth will continue to outperform during 2023, coming in above 6.0%yr – a rate materially above authorities’ guidance and current market estimates. The primary support for this view from the March data round is the building strength in consumer spending, year-to-date retail sales growth jumping from 3.5%yr in February to 5.8%yr in March. Although property investment disappointed, likely as a result of the limited pipeline of work to be done on existing projects, residential property sales created confidence in the outlook for 2023 and beyond, year-to-date growth accelerating from 3.5%yr in February to 7.1%yr in March. That new home prices look to have based and are now rising points to further near-term momentum in activity, particularly given the robust health of household wealth and income. In our view, the momentum apparent in China’s domestic economy along with their exposure to Asia will well and truly offset the negative influence of weakening developed-world demand, setting China apart from other major economies in 2023 and beyond.
Turning to the US, data has been light this week and concentrated on housing. Starts and permits remained volatile in March as they were caught between tight financial conditions and a lack of new housing supply. Existing home sales meanwhile disappointed falling 2.4%, although it remains unclear whether demand or supply is the prime influence.
Arguably of greatest significance for US monetary policy however was the release of the latest Beige Book, covering conditions across the 12 Federal Reserve districts. Broadly this update suggests the US economy is stagnating and that labour market slack is building, weighing on wage growth and easing risks related to inflation. Also critical for policy into 2024, “Several Districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity”.
Together with the sanguine inflation data received last week, these observations point to little need for further action by the FOMC to tame inflation. The economy arguably instead needs an extended period of stable contractionary policy to allow remaining inflation risks to abate and consumer expectations to reset without heightened fears over economic activity. However, we also need to be aware of the mindset of FOMC members, many of whom continue to reference a need for a further marginal increase in the policy rate, which the market is taking to mean another 25bp hike at or before the June meeting. Whereas FOMC members argue policy will then remain on hold for a lengthy period, the market has approximately 75bps of rate cuts priced by January 2024. This view speaks to the downside risks that are building for activity given the already contractionary stance of monetary policy and the tightening of financial conditions occurring through the US banking system.