Sample Category Title

Daily Pivots: (S1) 0.9079; (P) 0.9126; (R1) 0.9155; More....

Intraday bias in USD/CHF remains neutral with focus on 0.9087 support. Decisive break there will indicate rejection by 0.9243 key resistance and turn bias back to the downside 0.9009 support. On the other hand, strong rebound from currently level, following by firm break of 0.9243 will carry larger bullish implication.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Further rise would be seen as long as 55 D EMA (now at 0.8993) holds. But upside should be limited by 0.9243 resistance, at least on first attempt. However, decisive break of 0.9243 will argue that the trend has already reversed and turn medium term outlook bullish for 1.0146.

Daily Pivots: (S1) 1.2490; (P) 1.2517; (R1) 1.2563; More...

No change in GBP/USD's outlook as range trading continues. Intraday bias remains neutral at this point. On the upside, above 1.2568 will resume the rebound from 1.2298. Sustained break of 55 D EMA (now at 1.2577) will argue that fall from 1.2892 has completed already, and bring further rise to this resistance. Nevertheless, on the downside, break of 1.2448 minor support will indicate that rebound from 1.2298 has completed, and turn bias back to the downside for this low.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Fall from 1.2892 is seen as the third leg. Deeper decline would be seen to 1.2036 support and possibly below. But strong support should emerge from 61.8% retracement of 1.0351 to 1.2452 at 1.1417 to complete the correction.

Markets

A dovish Powell - or the absence of a hawkish one - lifted core bonds for a second day straight. Treasuries outperformed thanks to an acceleration in early US dealings. A mixed bag of (second tier) economic data left neither significant nor permanent marks. US yields eased between 2.1 (30y) and 8.8 bps (2y). The 2y yield faced a minor technical setback by losing the three-weeks old upward trading range. German rates lost about 4.5 bps across the curve. EUR/USD fell in European dealings before the accelerated drop in US yields threw the pair a lifeline. A generally weaker dollar brought EUR/USD to a close of 1.0725 eventually. The back-to-back decline in USD/JPY (153.64) was the first since early March. Japanese officials probably breathe a sigh of relief as the yen appreciates further this morning to just south of USD/JPY 153, easing the immediate need for a third intervention this week. The other two took place on Fed-day (Wednesday), minutes after the US stock market closed (estimated at JPY 3.5 tn) and Monday (JPY 5.5 tn) in thin-liquidity circumstances due to Japan observing a holiday. Japanese financial markets are closed again today and next Monday. Keep an eye out should the yen re-weaken sharply as Japanese authorities apparently like to exploit these kind of trading circumstances. Looking at today’s economic calendar, the April services ISM is scheduled for release in the US. After an unexpected setback in March, the April reading for services is anticipated to recover marginally from 51.4 to 52. The April payrolls report is probably going to grab most of the headlines as Fed chair Powell again cited an unexpected (sharp) weakening of the labour market as one of the paths “in which you could see us cutting rates”. Consensus expects the pace of job gains to ease from a stellar 303k to a still-solid 240k. Wage growth may come in at 0.3% m/m, which is probably still too fast to be consistent with inflation returning to 2% considering that would bring the annualized figure based on the four months of 2024 to more than 4%. After a hawkish repositioning during April and in the wake of the Fed policy meeting, we think short term market risks are skewed towards the dovish side. Figures that fall in line or shy of the consensus are probably enough to extend a correction higher in core bonds, with Treasuries outperforming. This makes the dollar vulnerable for the time being as well, more so against a risk-on background. EUR/USD’s first topside reference is situated at 1.0807.

News & Views

The Czech National Bank unanimously decided to lower its policy rate by 50 bps, from 5.75% to 5.25%. While Czech inflation hit the 2% target in February and March and the CNB lowered its 2024 CPI forecast from 2.6% to 2.3%, risks around the new outlook remain modestly inflationary. Their materialization would bring inflation back to the upper bound of the tolerance band and suggest that the CNB should persist with a tight monetary policy, approaching further rate cuts with great caution. CNB governor Michl at the press conference added that cuts may be halted at restrictive levels if needed. In the meantime, the CNB turned less pessimistic on the economy (2024 GDP forecast 1.4% from 0.6%; 2025: 2.7% from 2.4%). The interest rate path in the new forecasts is significantly higher than three months ago and more in line with levels communicated by CNB members (4.25% end 2024; 3-3.25% end 2025). The CNB board also considers it highly likely that the natural rate of interest has risen slightly compared with the pre-Covid period. Currently, internal models still assume a neutral rate of 3%. The front end of the CZK swap curve underperformed yesterday (2-yr: +5 bps) following the hawkish 50 bps rate cut (which might be the final one of this size). EUR/CZK closed below 25 for only the second time since early February.

Bank of Korea governor Rhee told reporters at an Asia Development Bank conference that it will reconsider the timing of policy rate cut. Growing anticipation that the Fed will keep policy tight for longer, the Korean won’s depreciation and faster-than-expected Q1 growth are the key reasons. “Whether the rate cut timing will be pushed back, how much it will be pushed if it is, or if it will even come will be the question that needs to be reviewed”. The Bank of Korea kept its policy rate stable at the peak level of 3.5% for 10 straight meetings, but flagged the potential of a rate cut later this year given disinflation dynamics. KRW profits with USD/KRW dropping back from 1375 towards 1360, painting a short term technical double top formation on the charts.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut and has broad backing. EMU disinflation will continue in April and bring headline CPI (temporarily) at/below the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed’s higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective. Upcoming CPI readings and a resilient economy/labour market will continue to prevent the Fed to cut rates fast nor deep. September at the earliest, but December is more likely. US yields, especially at the front end, could catch a breather after the recent sharp repricing, but their bottom is well protected.

EUR/USD

Economic divergence (US > EMU) and a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead pulled EUR/USD towards the previous YTD low at 1.0695. Stronger-than-expected US March inflation figures forced a first break. But after April’s sharp US yield repositioning, we expect some consolidation to weigh on the dollar short term.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling’s downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 - 0.8768 trading range serving as the first real technical reference.

In focus today

Today we get the US April Jobs Report which will round off the interesting week it has been in markets. We expect non-farm payrolls growth to cool to +200k, as immigration-driven uptick in labour supply continues to boost employment in lower-paying services sectors, but April PMIs suggested that elsewhere demand for labour is weakening. Average hourly earnings growth likely eased to +0.2% m/m SA. In the afternoon, ISM April Services index is also due for release.

At 10.00 CET Norges Bank (NB) announces its policy rate. We expect NB to keep the policy rate unchanged at 4.5% which is in line with both consensus and market pricing. Hence, market focus will be on any commentary on developments and the outlook for potential rate cuts this year. A lot of factors have pointed to the upside since March, but on the other hand realised inflation figures continue to come in below expectations, confirming that the disinflationary trend persists. Hence, we do not expect NB to send any new policy signals at this stage and reiterate that "... the policy rate will likely be kept at that level for some time ahead.' We expect no direct reference to the September meeting, but that was not the case at the March-meeting either.

In the euro area focus will be on unemployment rate for March. We expect that the unemployment rate remained unchanged as suggested by the PMI employment index.

We wish you a happy Friday and good weekend!

Economic and market news

What happened overnight

Asian markets this morning are mostly continuing where US markets left off last night. As such we see Australia, South Korea, and Hong Kong all in the green this morning, whereas Japan and Shanghai are slightly down.

Futures in the US for Dow Jones, S&P500 and Nasdaq are all up this morning pointing to a continuation of yesterday's session where the US indices all gained between 0.85% and 1.51%.

In commodities, Brent is slightly up from its close yesterday, trading at around 83.85 USD/bbl.

What happened yesterday

In the US, productivity for Q1 2024 came in at 0.3% y/y well below consensus expectations of 0.8% y/y. The number marks a clear slowdown from the previous quarter which stood at 3.2% y/y.

The lower growth rate in productivity caused a pronounced uptick in non-farm unit labour costs, which rose to 4.7% y/y outstripping consensus expectations of 3.3% y/y, and far higher than the prior 0.4% y/y. Hence, this may also serve to somewhat explain why we saw more broad-based price increases in Q1 as well.

In Switzerland, April inflation surprised to the topside coming in at 1.4% y/y for the headline (consensus: 1.1% y/y, prior 1.0% y/y). Core inflation stood at 1.2% y/y (consensus: 0.9% y/y, prior 1.0% y/y). Both headline and core saw upticks to momentum with seasonally adjusted m/m rates increasing for both. The upwards move was however caused by volatile categories such as package holidays and air transport; hence we do not see cause for putting too much weight on April's uptick. Markets reacted to the inflation print by now only pricing in 15bp cut by the SNB's June meeting compared to 24bp pre the release. As the uptick was mainly driven by said volatile categories, we stick to our call for a 25bp cut in the June meeting by the SNB.

In Turkey, officials were cited by Bloomberg saying the country had stopped all trade with Israel halting any import and export to and from the country as of Thursday.

In Japan, data suggested authorities had indeed intervened in FX markets a second time this week as widely speculated by market participants, after the yen took flight and went from around 157.5 to as high as 153 against the dollar (USDJPY) in around 40 minutes. Data suggests authorities spend upwards of USD26.5bn intervening late Wednesday in a market otherwise relatively thin on liquidity at that time. Thus, this brings the total amount spent this week on intervention by Japanese authorities to upwards of USD61.5bn. This morning USDJPY is trading at around 152.95.

In Sweden, manufacturing PMI came in at 51.4 up from 50.4 last month. Subindices posed a somewhat mixed picture with new orders rising for both domestic and export categories, whereas production edged lower. The price index for raw materials and intermediate goods increased from 46.8 to 53.4, so a rather big jump and a larger jump than what we saw in the ISM US Manufacturing Prices Paid this week. However, the development should not give reason to concern as it is still below the index's average level in the period from the Great Recession to the pandemic when inflation was in line with the inflation target. Overall, the higher reading points to continued improvement in economic conditions.

In Norway, manufacturing PMI rose to 52.4 from 50.7 the month before. The PMI readings have so far this year mostly been in the range of 51-52, thus signalling positive but sub-trend growth in the manufacturing sector, despite a strong recovery in oil-related industries.

The OECD lifted its outlook for global growth. The organisation forecasts the global economy would achieve a growth rate of 3.1% this year, same as last year, and next year grow marginally more at 3.2%. Back in February the organization forecasted growth this year at 2.9%, and growth next year at 3.0%. The upwards revision was driven especially by a lift to Chinese growth boosted by public spending, as well as a higher US growth outlook the organization said helped offset less positive outlooks for Europe and Japan.

In the Czech Republic, the central bank lowered interest rates by 50bp in line with consensus expectations, hence the Czech policy rate now stands at 5.25%.

Daily Pivots: (S1) 1.0689; (P) 1.0710; (R1) 1.0745; More...

Range trading continues in EUR/USD and intraday bias stays neutral. On the upside, break of 1.0752 will resume the rebound from 1.0601. Sustained trading above 55 D EMA (now at 1.0769) will argue that fall from 1.0980 has completed. On the downside, though, break of 1.0648 will retain near term bearishness and bring retest of 1.0601 low first.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Current fall from 1.1138 is seen as the third leg. While deeper decline is would be seen to 1.0447 and possibly below, strong support should emerge from 61.8% retracement of 0.9534 to 1.1274 at 1.0199 to complete the correction.

Dollar weakens broadly in Asian session, continuing its selloff from the previous night, as influenced by rebound in US stocks and falling treasury yields. The focus is now squarely on today's non-farm payroll report, a key indicator closely monitored by Fed policymakers. Preliminary data suggest possibility for an upside surprise in the jobs figures

For the Federal Reserve to consider rate cuts, there needs to be a clear trend of loosening in the job market that could contribute to cooling domestic inflation. Strong employment data today would suggest that high interest rates would need to persist longer than some investors anticipate, maintaining a restrictive policy environment to temper inflation pressures.

Overall for the week, the greenback in now the worse performer, followed by Canadian and then Euro. Yen remains the strongest one with help from alleged intervention earlier in the week. Australian Dollar is the second strongest, particular benefiting from extended rally in Hong Kong stocks. Swiss Franc is the third strongest, after rebounding on stronger than expected inflation data. Sterling and Kiwi are currently positioning in the middle.

Technically, CAD/JPY is currently the second biggest mover for the week, down more than -3.4%. Risk will stay on the downside as long as 113.79 minor resistance holds. While corrective fall from 117.30 would spiral lower, strong support should emerge above 108.66 to contain downside. Meanwhile, break of 113.79 will suggest stabilization and set the range for sideway trading.

In Asia, Nikkei fell -0.10%. Hong Kong HSI is up 1.34%. China is on holiday. Singapore Strait Times is up 0.34%. Japan 10-year JGB yield is up 0.0101 at 0.906. Overnight, DOW rose 0.85%. S&P 500 rose 0.91%. NASDAQ rose 1.51%. 10-year yield fell -0.0240 to 4.571.

ECB's Lane specifies three guiding factors for speed and scale of rate cuts

ECB Chief Economist Philip Lane reiterated the central bank's cautious stance on interest rate policy in a speech overnight, underscoring that rate decisions will remain "data-dependent" and determined on a "meeting-by-meeting" basis. While ECB is open to rate cuts if inflation converges to target in sustainable manner, Lane emphasized that the bank is "not pre-committing to a particular rate path."

Lane elaborated on the factors that will guide ECB's decisions on the "speed and scale" of rate cuts. Firstly, he noted that the effects of previous interest rate hikes are "still unfolding", with their full impact on inflation expected to manifest gradually. While the impact on GDP peaked in 2023, the "bulk of impact on inflation is comparatively backloaded" with substantial pass-through effects yet to occur.

Additionally, the evolution of inflation expectations remains a critical consideration for the ECB's policy calibration. Lane also pointed out the dual risks associated with the timing of policy adjustments: easing too soon or too quickly could undermine stabilization efforts, while maintaining overly restrictive rates could hinder economic recovery.

US non-farm payroll takes center stage

US Non-Farm Payroll report stands as the focal point for global financial markets, with significant implications for Fed's monetary policy easing decisions ahead. Throughout this year, the labor market has continually surprised economists by maintaining robust growth, contrary to predictions of a slowdown. This resilience has placed the Fed in a predicament, as policymakers remain reluctant to initiating interest rate cuts without more definitive signs that inflation is under control.

This month's employment data, while not sufficient on its own to prompt immediate policy easing, is crucial for establishing a trend that could influence Fed's confidence levels. For Fed to consider loosening its policy stance later in the year, key metrics including headline job growth, unemployment rate, and wage growth must start collectively pointing towards a cooling job market.

Market expectations for today's NFP include job growth of 243k and unemployment rate holding steady at 3.8%, with average hourly earnings anticipated to increase by 0.3% mom. Related data saw 192k ADP private job growth. ISM Manufacturing Employment rose slightly from 47.4 to 48.6. There was a marginal decrease in the 4-week moving average of initial unemployment claims to from 214k to 210k. All suggest the prospect for an NFP figure that could exceed expectations.

In terms of market reactions, 10-year yield is worth some attention. Break of 4.568 support will argue that a short term top is already formed at 4.730. Deeper pullback would be seen back to 55 D EMA (now at 4.414) or even further to 38.2% retracement of 3.780 to 4.730 at 4.367. If realized, this decline in 10-year yield would be a drag to Dollar, in particular in USD/JPY.

Elsewhere

France industrial output, Italy unemployment, UK PMI services final, and Eurozone unemployment rate will be released in European session. Later in the day, US ISM services will also be released after non-farm payrolls.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0689; (P) 1.0710; (R1) 1.0745; More...

Range trading continues in EUR/USD and intraday bias stays neutral. On the upside, break of 1.0752 will resume the rebound from 1.0601. Sustained trading above 55 D EMA (now at 1.0769) will argue that fall from 1.0980 has completed. On the downside, though, break of 1.0648 will retain near term bearishness and bring retest of 1.0601 low first.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Current fall from 1.1138 is seen as the third leg. While deeper decline is would be seen to 1.0447 and possibly below, strong support should emerge from 61.8% retracement of 0.9534 to 1.1274 at 1.0199 to complete the correction.

Economic Indicators Update

Sentiment is not bad for a week which confirmed that the Federal Reserve (Fed) won’t cut the interest rates anytime soon. Stocks rebounded and yields fell yesterday, the S&P500 kept floor above the 5000 psychological mark, Nasdaq 100 jumped 1.30% as the US 2-yer yield slipped below 4.90% despite data showing a bigger than expected jump in unit labour costs combined to a larger fall in productivity over the same month. Factory orders fell in April – which could’ve been good news for the Fed doves, but no - input prices rose at the highest speed since the 2022 peak in inflation. So my conclusion was that: investors just want the stocks to rally even in May, and defy the popular saying ‘sell in May and go away’.

Good news: Apple did just fine after the announcement of its most feared quarterly results yesterday, after the bell. The 10% drop in iPhone shipments to China has been keeping investors up at night regarding the Q1 results. The sales dropped 4% - very very slightly less than expected by analysts, but a 14% jump driven by App Store sales, higher-than-expected earnings, a higher dividend and a $110bn stock buyback sent the stock price 6% in the afterhours trading. The company didn’t say anything new regarding its AI efforts though, we will have to wait the June 10th to more details about AI. Pricewise, the post-earnings rally could help Apple break above its ytd descending channel top and pave the way for more gains – on hope to hear something worthy on the AI front in the next few weeks.

Jobs watch

US futures are up in the wake of better-than-expected Apple results, and ahead of today’s much-important US jobs data. The jobs data will be more important this time than in the past due to increased uncertainty regarding the future of the Fed policy. The US economy is expected to have added around 240K new nonfarm jobs in April, the average pay is expected to have grown slightly slower on a yearly basis, and the unemployment is seen steady at 3.8%. A hotter-than-expected data, especially on the wages front – should easily fuel the hawkish Fed expectations and weigh on equity and bond prices before the closing bell. A softer-than-expected set of data, on the other hand, should give some relief to the Fed doves before the week comes to an end.

We can’t predict where the market will be headed after the data, but based on the cost of ATM puts and calls expiring today, Citigroup predicts that the S&P500 could move 1.2% up or down as a reaction to the data.

FTSE 100 is in a sweet spot

Elsewhere, the British FTSE 100 continues to perform well. The almost 2% jump in Shell following over $1bn profit beat yesterday certainly helped keeping mood in the British blue-chip index intact. They also announced a $3.5bn stock buyback. Zooming out, the FTSE 100 is up by 10% since the January dip. The UK economy doesn’t make anyone dream, and indeed the OECD cut its outlook for the UK economy and expects it to grow by a meagre 0.4% this year – just better than Germany that sits at the bottom of the range with a morose 0.2% growth. But who cares, Britain’s biggest companies bring the majority of their revenues from abroad, so all the British blue-chips need is a strong world economy. And the OECD predicts that the world economy will grow more than 3% this year – 0.2 percentage points better than their February forecast. Also, note that the reflation trade – that comes along with the expectation of looser monetary policies across the globe and that benefits to cyclical names like energy, mining companies and financials – continue to play in favour of the index. So if all goes according to plan, the FTSE 100 should do just fine in the coming months. What could go wrong? Well, inflation – inflation could go wrong and delay the reflation gains.

In the FX

The US dollar is under selling pressure this morning, the EURUSD is drilling above a minor Fibonacci retracement with risk of seeing gains reversed after today’s US jobs report. The USDJPY continues to retreat thanks to intervention – and the speculation regarding intervention – from the Bank of Japan (BoJ) this week, while Cable tests the 200-DMA to the upside. The common denominator for what’s next is the US jobs report. A strong report could easily reverse gains in major peers, fuel the hawkish Fed expectations and back a dollar appreciation before the weekly closing bell.

US Non-Farm Payroll report stands as the focal point for global financial markets, with significant implications for Fed's monetary policy easing decisions ahead. Throughout this year, the labor market has continually surprised economists by maintaining robust growth, contrary to predictions of a slowdown. This resilience has placed the Fed in a predicament, as policymakers remain reluctant to initiating interest rate cuts without more definitive signs that inflation is under control.

This month's employment data, while not sufficient on its own to prompt immediate policy easing, is crucial for establishing a trend that could influence Fed's confidence levels. For Fed to consider loosening its policy stance later in the year, key metrics including headline job growth, unemployment rate, and wage growth must start collectively pointing towards a cooling job market.

Market expectations for today's NFP include job growth of 243k and unemployment rate holding steady at 3.8%, with average hourly earnings anticipated to increase by 0.3% mom. Related data saw 192k ADP private job growth. ISM Manufacturing Employment rose slightly from 47.4 to 48.6. There was a marginal decrease in the 4-week moving average of initial unemployment claims to from 214k to 210k. All suggest the prospect for an NFP figure that could exceed expectations.

In terms of market reactions, 10-year yield is worth some attention. Break of 4.568 support will argue that a short term top is already formed at 4.730. Deeper pullback would be seen back to 55 D EMA (now at 4.414) or even further to 38.2% retracement of 3.780 to 4.730 at 4.367. If realized, this decline in 10-year yield would be a drag to Dollar, in particular in USD/JPY.

ECB Chief Economist Philip Lane reiterated the central bank's cautious stance on interest rate policy in a speech overnight, underscoring that rate decisions will remain "data-dependent" and determined on a "meeting-by-meeting" basis. While ECB is open to rate cuts if inflation converges to target in sustainable manner, Lane emphasized that the bank is "not pre-committing to a particular rate path."

Lane elaborated on the factors that will guide ECB's decisions on the "speed and scale" of rate cuts. Firstly, he noted that the effects of previous interest rate hikes are "still unfolding", with their full impact on inflation expected to manifest gradually. While the impact on GDP peaked in 2023, the "bulk of impact on inflation is comparatively backloaded" with substantial pass-through effects yet to occur.

Additionally, the evolution of inflation expectations remains a critical consideration for the ECB's policy calibration. Lane also pointed out the dual risks associated with the timing of policy adjustments: easing too soon or too quickly could undermine stabilization efforts, while maintaining overly restrictive rates could hinder economic recovery.

Full speech of ECB's Lane here.

The RBA is on hold until inflation falls further. A scenario necessitating a rate hike is not impossible, but it is unlikely, and it would only take shape later in the year.

With the inflation surprise in the March quarter and some further upside possible in the June quarter, the outlook for rate cuts in Australia has been pushed out. The timing of expected rate cuts in the United States has also been pushed out.

One body of opinion goes further, though, holding that rate hikes are necessary and likely in Australia. The reasoning seems to be that, because the RBA raised rates less than the Federal Reserve, it has (by definition) not done enough and will therefore end up having to do more. The unstated presumption behind this reasoning is that both countries face the same shock and the same context, and therefore the appropriate stance of policy is the same (and produced by the same level of the policy rate). Another unstated assumption in this line of argument is that the feasible rate of unemployment is well described by past averages or minimums, and therefore current rates are too low.

In our view, these presumptions are unjustified. As we have noted in the past, the United States is something of an outlier among peer economies. Domestic demand growth is outstripping that in peer economies; headline inflation is stabilising not still falling; and consumption per capita consistently rising. Both countries have tight labour markets, but our assessment is that next year will see labour market slack emerge in Australia.

More broadly, the two countries are facing very different fiscal contexts, which helps explain why domestic demand growth remains strong in the United States and weak in Australia.

This different fiscal context is in part shaped by the actual and perceived interest-sensitivity of the Australian household sector. Nowhere else in the advanced world is the discourse so aghast at the idea that fiscal policy might add to demand, thereby slowing the hoped-for disinflation and delay (or even reverse) the hoped-for rate cuts. Likewise, nowhere else in the world is the fiscal policymaker so incentivised to avoid a further rate hike.

Recall that while tax cuts are coming, these mostly give back recent bracket creep and are necessary to achieve even the small improvement in growth we expect over the second half of this year. They are also already in everyone’s forecasts. So they cannot be used as a reason to hike rates unless and until evidence emerges that the consumption (and so inflation) response to the tax cuts is larger than anticipated. That evidence, if it were to emerge, will not do so until late this year or early next year. In the here and now, retail spending and consumption more broadly are weak, and consumer sentiment remains extremely subdued.

A reasonable counter to this view is that the state governments are adding to demand. There are also longer-term issues around the structural budget balance. That is a separate issue from macroeconomic management over the cycle, though. State governments are in any case showing themselves to be sensitive to the need to be seen not to add to measured inflation. This week’s announcement by the Queensland government of an increase to electricity rebates is a case in point. Actual electricity bills will be lower, and so measured CPI inflation will be slightly lower, in the second half of the year as a result of that announcement.

Another line of argument for a rate hike hangs off the surprise in the March quarter inflation and labour force data. And maybe that argument is compelling to some of the decision-makers in Chifley Square. The nagging doubt around that course of action is that this was what happened last November, only to see a significant downside surprise in the December quarter inflation and real-side data. The result was that the RBA’s February 2024 forecast for trimmed mean inflation over 2025 reversed the upward revision in the November 2023 forecast round. Past surprises are most relevant for what they say about the future. There is no point warning that the disinflation journey could be bumpy if you then treat every bump as a change in trend.

There is a state of the world in which the RBA would need to raise rates. Consider a scenario where services inflation fails to decline further, the federal Budget later this month is more expansionary than expected, and the Fair Work Commission hands down a decision for an increase in the minimum wage not much below last year's outsized result, even though inflation is much lower one year on. None of these outcomes seem likely given the atmospherics, but it is understandable that policymakers might want to see the actual results, and a bit more progress on inflation, before even thinking about cutting rates.

Could they hike? Not yet, and probably not given the current run of data. The language following next week’s meeting could be more hawkish. In the end, though, the Board will and should remain forward looking. We continue to expect the next move to be a cut, down the track.