There is no shortage of people who, having seen the unemployment rate shoot up to 5.4%, seen business conditions drop and watched the confidence measures fall, question the RBA’s decision to hike in November; especially against the weaker Q3 CPI. Now obviously the RBA’s minutes (Tuesday 1130) won’t be able to touch on those issues as the data came out after the decision, but to be honest, I doubt the RBA is fussed about recent moves – at least at this stage.
Take that jump in the unemployment rate. For mine, it more likely reflects statistical noise rather than any let up in growing labour constraints. I got a few emails after a my labour force note last week suggesting I was downplaying the supply side response and, to a degree, I am. That there is a structural lift in work force participation can’t be debated, it’s been evident for years, yet the pace at which it increases can be debated and I would argue that it is very unusual, not impossible, but unusual to see such a rapid lift in work force participation.
Similarly the confidence and business conditions numbers have been very volatile throughout the GFC and we can’t look at one month as being representative of a broader trend. I mean we can’t do that as a general rule, and that’s doubly so now. The trick for the RBA is to get the medium term macro view right and this is what I think the minutes will focus on. Now remember the Bank released their quarterly Statement on Monetary Policy a few days after the decision and so we already have a pretty good idea of what the Bank’s medium term view is (unchanged effectively). Essentially, the terms of trade is at or near it’s highest level since Federation. This will boost income, investment and jobs etc etc, and as a result, it is likely the CPI has troughed and capacity constraints will develop/intensify.
With that as the Bank’s medium term view, I reckon the recent global dataflow has been much more important than the highly variable monthly domestic data, in assessing the decision to hike. I mean think about it. If you suspect a record terms of trade is going to underpin domestic economic growth for years to come, the single biggest threat to that view (or downside risk) comes from global growth prospects. The thing is, we now know that the global economy expanded at a fairly decent clip in Q3, a far cry from the marked slowdown that many were expecting. So we know growth in the Asian region remains strong, and indeed growth in the US and Europe is not doing too badly either (at the very least downside risks have eased materially). Consequently I doubt the RBA board regrets the decision to hike and in fact they probably feel more confident they made the right decision.
Looking forward I doubt the RBA will hike again in December following recent commercial bank actions. Nevertheless I think they will certainly hike again. The global economy is only going to accelerate in 2011 and I think the greater risk is that growth outcomes blitz expectations. Robust growth and excessively loose monetary policy is a dangerous combination, and I suspect inflation will be all consuming in 2011. The fact the market is only pricing in 1 rate hike to June 2011 provides a fairly decent medium term opportunity to go short and I would be looking for another rate hike in Q1 (33% priced ) with a follow up in Q2 (not priced) not considering any future commercial bank actions.
Other than that, Australian data is actually pretty light this week. Motor vehicle sales are out today (1130) and then we have wage data on Wednesday and also Thursday, yet wage growth isn’t exactly market moving stuff at the moment, so I imagine it’ll pass without incident. Remember that wage prices on Wednesday (1130) are the best measure of wage inflation and average weekly ordinary time earnings (Thursday 1130) are the better measure of incomes growth. Finally the RBA Deputy Governor gives speech on Thursday (4pm AEDT).
We have a barrage of data out of the US. Kicking off tonight we get retail sales and the market is looking for another decent outcome. Credit card data and actual store reports, point to solid spending in October. The November Empire manufacturing survey and business inventories are also out tonight. Tuesday night we see October industrial production and PPI a well as the NAHB housing market index. The on Wednesday we get the October CPI and housing starts with the Philly Fed index and jobless claims on Thursday. We also get a number of Fed speakers throughout the week with Bernanke appearing on an ECB panel with Trichet and others on Friday. Don’t forget the Fed are out and about buying treasuries every day this week, cumulative $45bn worth.
Other than that, check out euro zone CPI and the German ZEW on Tuesday and then construction output Wednesday. The UK release the BoE’s minutes Wednesday night and I cant wait to see if Posen is still voting for further QE, despite strong growth and high inflation.
Hope you have a great week….
When I first saw those CPI numbers I was inclined to think the RBA would hold steady at this November meeting (Tuesday 1430). Headline came in as expected, but the trim and weighted median were certainly much weaker, implying underlying inflation slipped from 2.7%y/y to 2.5%y/y in Q3. With core inflation well within the band, all is good and well right?
The issue is complicated by the fact that the RBA looks at a broader set of underlying measures and when you consider some of them, core inflation doesn’t look so sweet. It’s quite possible that core inflation isn’t as soft as suggested by the two measures mentioned above and that underlying inflation actually remains around 2.7% in annual terms (or just below at 2.6%). It’s just too hard to know with any degree of confidence and in part, that’s why I don’t think these numbers really change anything. I still reckon the RBA will hike at this meeting.
Remember, RBA statements suggest there are 3 issues under consideration: 1) Whether Aussie growth is around trend or not; 2) whether inflation is close to target or moderating etc and; 3) whether global uncertainties are being resolved (or whether the global outlook was improving etc).
Naturally, the month to month decision is based on the interplay between these three issues. On the domestic growth front we haven’t seen anything that will likely change the view the Aussie economy is growing around trend. Similarly and as mentioned, the Q3 CPI data probably won’t change the RBA’s medium term inflation assessment (for core to edged back up to the top of the band by 2012). It’s not so much that these inflation figures are a smoking gun or anything, far from it. Yet when I think about it, they’re just not ‘good’ enough to change the notion that we are going into this recovery with an already elevated inflation rate. At best we might be able to say the trough will be a little lower, at best though and even this isn’t clear. So when you sit back and think about whether the Q3 numbers materially impact the outlook, the answer is probably no.
Globally, we’ve obviously learnt a lot since the October meeting when the RBA Board wanted a little more time to assess global uncertainties. On any reasonable assessment, global growth concerns have diminished somewhat since that meeting. Indeed we have witnessed a barrage of data that, by and large, show a substantial decline in prospects for a double dip recession in the US. Moreover, data in Europe and Asia generally show still firm, albeit slower, growth outcomes. At the very least, there is nothing to suggest some of the more pessimistic scenarios that were being bandied around are in any way shape or form close to becoming a reality.
So the question is, what tactical obstacles to a rate hike remain? For mine the answer is none. The RBA held steady at the October meeting to assess the CPI and the barrage of global growth data. Having seen all that flow we know that 1) Aussie growth is still at trend; 2) medium term inflation is still more likely to pick-up and 3) the global backdrop looks good (bad stuff didn’t eventuate). True to say that we get a lot of Q3 growth data in the lead up to the December meeting and perhaps the Board will want to see this data. For mine though there was never really any major controversy as to the domestic growth data and so there is nothing really to wait for – not to mention the fact that you could make that argument every month. Nope, for mine, the last month was pivotal in assessing some of the downside global risks – it’s clear that the worst didn’t eventuate and so the RBA will resume tightening.
The other big event this week is the Fed and weighing recent fed rhetoric, it seems clear they’ll print more money after the November 2-3 meeting. As to the amount, well $100bn per month seems to be the consensus although it’s unclear whether they’ll limit the initial move to a 3 month program or a 6 month program or whatever. I don’t have a strong view on this as I don’t think the decision is based on US economic prospects (which remain good). I think it is quite obvious, given the better-than-expected dataflow, that the decision to print is political (which by the by is why I reckon the RBA will ignore it to some extent) and more reflects an attempt by the US to force a global rebalancing. The economic case to print is non-existent in my opinion and this action will do little to lift economic growth. Treasury yields may or may not go lower and I have seen very compelling arguments on both sides as to why yields would go up or down. Market psychology is all important here, but increasingly Fed actions are being viewed with contempt so they are playing a very dangerous game. Not one punter I’ve spoken to, domestically or abroad, has a positive view on Qe2 and I’ve seen very little positive commentary about it. The Fed risks a lot here.
The RBA and the Fed are pretty much the main events but don’t forget the US mid-term elections and of course there is a barrage of domestic and global data. In Australia we get house prices today at 1130 (mkt 0.0%) and TD’s inflation gauge at 1030.The RBA’s commodity price index is also out today at around 1630. Building approvals are due Wednesday (1130) with the market again looking for a flat outcome. Retail sales (mkt and me at +0.5%) and trade follow on Thursday and then we get the RBA’s quarterly Statement on Monetary Policy on Friday.
US data includes the ISM index tonight alongside personal income and spending. The other big data release is then payrolls on Friday (mkt at +60k). Otherwise check out PMI’s from China and the Euro zone and the ECB, BoE and BoJ meetings (calendar attached).