RBA rate cut

Chris Scicluna
Emily Nicol

Many of the main Asian equity indices were weaker today – perhaps unsurprisingly after yesterday saw US tech stocks take a beating (NASDAQ 100 down 2.1%) on reports that the FAANGs might be facing antitrust action and after the US manufacturing ISM index slipped to its lowest since October 2016. But while China’s CSI300 is down about 1%, in the absence of major domestic economic news Japan’s Topix closed effectively unchanged, even as the yen remained at 108/$ for the first time since early January. And following yesterday’s sharp bond market moves – which at one point saw 2Y UST yields drop close to 1.81% and 10Y UST yields fall below 2.10%, both their lowest since late 2017 as FOMC member Bullard said that a rate cut might be “warranted soon” – the Treasury rally paused overnight. But yields on 10Y JGBs still fell to below -0.10%, the lowest since August 2016.

Elsewhere, however, Aussie equities made modest gains (ASX up 0.2%) while ACGBs were slightly firmer as the RBA delivered the expected 25bp cut in its cash rate to a record low of 1.25% and left the door open to additional easing (detail below). The latest Aussie retail sales data disappointed to support the case for further rate cuts. And in the UK, yesterday’s contractionary manufacturing PMI was followed overnight by an exceptionally weak retail survey too (detail below). Meanwhile, Bunds (10Y yields back below -0.21%) are firmer ahead of today’s flash euro area inflation data, which could see the headline rate fall to its lowest in more than one year and the core rate fall back below 1.0%Y/Y once again.

Euro area:
Ahead of Thursday’s ECB announcements, all eyes in the euro area today will be on the flash inflation estimate for May. While the headline and core CPI rates were always anticipated to fall back in May as April’s boost to services inflation related to the timing of Easter wore off, last week’s national inflation releases from the four largest member states for that month fell short of expectations. So, we expect headline euro area CPI to fall by a sizeable 0.5ppt in May to 1.2%Y/Y, which would be the lowest since February 2018. And while energy inflation is likely to have moderated, a notable drop in services inflation will trigger a significant decline in the core rate too, probably by 0.4ppt to 0.9%Y/Y.

Today will also bring the euro area’s latest labour market figures for April, which are expected to show that the unemployment rate remained unchanged at the 10½-year low of 7.7%. Spanish unemployment figures for May are also due, as is the first estimate of Q1 GDP from Greece. Politics will, of course, remain in focus, although Angela Merkel received a boost this morning as the SPD’s Secretary General Lars Klingbeil this morning insisted that the party would maintain its commitment to its Federal government coalition agreement with the CDU/CSU. In the markets, finally, Germany will sell 10Y index-linked bonds. 

Yesterday’s UK manufacturing PMI was particularly disappointing, with the headline index declining in May for the fifth month out of the past six and by a sizeable 3.7pts, to 49.4, the weakest since the post-referendum slump in July 2016 and only the second sub-50 reading for more than six years. And today’s equivalent construction survey is likely to indicate that conditions remained pretty subdued in that last month too – indeed, the headline PMI index is expected to be unchanged at 50.5 close to bottom of the range of the past year.

The gloomy economic outlook was also evident in today’s BRC retail sales monitor, which indicated a much larger than expected drop in retail sales in May, with the survey’s measure of total sales down 2.7%Y/Y, while like-for-like sales fell 3%Y/Y. Admittedly, this followed a notable Easter-related boost to sales in April (up 4.1%Y/Y and 3.0%Y/Y respectively) and compared with a strong performance in May 2018 when sales were boosted by better weather, a Royal wedding and the run up to the football World Cup. But when smoothing out the monthly volatility, the underlying message was still weak. Indeed, total sales growth fell by 1ppt to just 0.2%3M/Y, the softest pace since March 2017, with non-food sales down more than 1%3M/Y, the most in more than a year. And there was a notable slowdown in spending online last month too, with such sales up just 1.5%Y/Y, the weakest growth since the series began 10½ years ago.    

In the US, today will bring the release of April’s factory orders data. Despite an anticipated increase in orders for non-durable goods, the sharp contraction reported in the advance durable orders will likely see total orders fall back in April after a strong rise at the end of the first quarter. But given the recent sharp adjustment in global financial markets and a marked rise in expectations for Fed easing this year, most attention will likely be on the Fed’s two-day conference discussing the central bank’s policy framework, with Fed Chair Powell giving opening remarks at 13.55GMT.

The main event in Australia today was the conclusion of the RBA’s latest policy meeting. As had been widely expected, the Bank’s target cash rate was cut for the first time in three years by 25bps to a record low of 1.25%. The accompanying post-meeting statement also maintained a broadly dovish tone, in particular flagging heightened downside risks associated with the trade disputes. Nevertheless, the RBA still maintained its central scenario for GDP growth this year at around 2¾%, albeit continuing to highlight uncertainties regarding the outlook for household consumption. And it left unchanged its assessment on the inflation outlook too, expecting underlying inflation at just 1¾% in 2019, 2% in 2020 and “a little higher after that” – therefore still not entirely consistent with the RBA’s 2-3% target band over the forecast horizon. So, the RBA seemingly left the door open for further easing in due course, noting that it would continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth and achievement of the inflation target.   

Turning to the data flow, ahead of tomorrow’s full national accounts, today brought the latest balance of payment figures for Q1. These showed that the current account deficit narrowed significantly at the start of the year, to AUD2.9bn, the smallest deficit since Q297. This in part reflected stronger goods exports last quarter (up for the first quarter in three and by 0.7%Q/Q), to leave total export volumes up 1%Q/Q. So with overall imports having declined at the start of the year (-0.1%Q/Q), today’s release suggests that net exports contributed 0.2ppt to GDP growth in Q1. In addition, the ABS today released public sector figures for Q1, which suggested that government consumption rose 0.8%Q/Q, likely adding a further 0.2ppt to GDP growth. But the news regarding household spending at the start of the second quarter was downbeat. In particular, following a decline of 0.1%Q/Q in Q1, April’s retail sales figures reported an unexpected drop of 0.1%M/M, with falls in household goods retailing (-0.9%M/M), hospitality services (-0.7%M/M) and clothing sales (-1.2%M/M). That left the annual rate at a three-month low of 2.8%Y/Y, down from 3.5%Y/Y in March.   


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