No surprises from the RBA

Chris Scicluna
Emily Nicol

With little in the way of substantive economic news from the major East Asian countries to shift the mood today, the main regional equity indices were little changed too (Japan’s Nikkei closed unchanged on the day, while China’s CSI300 was up just 0.1%). But with the dollar having strengthened for a fifth day in a row – not least as Brexit concerns weighed on the euro (now down below $1.095) as well as sterling (below $1.20) – US equity futures fell, not helped by reports that US and Chinese officials have failed yet to schedule new trade talks.

In bond markets, the reopening of the UST market saw an initial rise in yields swiftly reversed, with 10Y yields currently back below 1.495%. 10Y JGB yields, meanwhile, have edged back down towards -0.29%. But with the RBA flagging “further signs of a turnaround in established housing markets, especially in Sydney and Melbourne” as it left its cash rate predictably unchanged, and the latest Aussie trade data beating expectations to provide a first current account surplus since 1975 (detail below), ACGBs have bucked the trend with modest losses (10Y yields up almost 2bps to 0.935%).

In the UK, after yesterday’s rambling statement in front of Number 10 from Boris Johnson revealed his preference for a snap general election, and ahead of today’s move by a cross-party group of MPs to try to block a seriously damaging no-deal Brexit (see more on this below too), Gilts have made further gains as political uncertainty ramps up to another level (10Y yields are now down to a new record low of 0.38%). And despite Austria’s national bank governor having yesterday added his name to the list of hawks trying to resist the momentum for a new ECB QE programme, euro area govvies have made gains this morning too, with 10Y Bund yields down below -0.72%.

Today will be another key day in the Brexit saga, as a cross-party group of MPs plans to take action to try to prevent the UK from leaving the EU at the end of October without a deal. In particular, MPs from a range of parties, crucially including several senior Conservatives, intend first to vote to take control of the order of business of the House of Commons away from the Government. If, as we expect, they are successful, they then plan to rapidly force through draft legislation, presented yesterday, that would compel the Prime Minister to request a three-month extension of the Article 50 deadline, i.e. to 31 January, if a deal with the EU has not been agreed by 19 October. While PM Johnson has threatened to prevent any rebel MPs from standing as Conservative MPs at the next general election if they vote against the Government, up to twenty prominent Tories seem likely to do so, sufficient to allow the anti-no-deal legislation to pass the House of Commons, most likely sometime tomorrow.

Before that anti-no-deal legislation is approved by the House of Lords, however, PM Johnson would now be expected to propose an early general election, seemingly for 14 October. That would be just three days ahead of the next key EU summit and 17 days before the Article 50 deadline, providing no time to negotiate and pass a new deal. Under the Fixed-Term Parliaments Act (FTPA), however, two thirds of all MPs would have to approve Johnson’s motion calling an early general election. And – as suggested last night by Labour Northern Ireland spokesman Tony Lloyd – we should perhaps not expect opposition MPs to vote in favour of the early election unless and until the anti-no-deal legislation has received Royal Assent.

Unsurprisingly, Brexit uncertainty continues to weigh on confidence and economic growth. After yesterday’s dire manufacturing PMI flagged the likelihood of a further contraction in production in Q3, the latest BRC retail sales monitor, released overnight, highlighted the likelihood of a weak quarter on the High Street. In particular, total sales on the survey measure were unchanged from a year ago in August, with like-for-like sales down 0.5%Y/Y. While food sales (up 0.5%3M/Y) continued to provide support to the trend, non-food sales were down 1.2%3M/Y. While growth in online non-food sales remained positive, but at 2.2%Y/Y this was the second-weakest reading on the series, which dates back more than a decade.

There were no surprises from the conclusion of the RBA’s latest Policy Board meeting, with the target cash rate left unchanged at a record low 1.00%. The accompanying statement was little changed from the last meeting too, although it still offered a dovish tone, emphasising that risks to the global outlook remain tilted to the downside and that domestic inflationary pressures were expected to remain subdued for some time yet.

Admittedly, the Policy Board maintained its view that domestic growth is expected to strengthen gradually going forward, supported by low interest rates and recent tax cuts. And it noted further signs of a “turnaround” in the housing market, with national prices having risen the most in nearly 2½ years in August with Sydney and Melbourne at the forefront. But while employment growth remained strong, the RBA reminded that increased labour participation had kept wage pressures subdued, with little signs of upward pressure on the horizon too. And so, the RBA maintained its view that inflation – both in headline and core terms – was expected to be a little under 2% throughout next year and only a little above 2% over 2021, barely consistent with the RBA’s 2-3% inflation target.

As such, the RBA reiterated that it would be “reasonable to expect an extended period of low interest rates”. And the statement again repeated that the Board will “ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target”. Given the RBA’s most recent forecasts – and not least as Q2 GDP growth looks set to fall short of its expectations – that easing of policy will likely be necessary, with our expectation for a further 25bps cut next month.

Ahead of tomorrow's Q2 GDP release, today’s balance of payments figures, published by the ABS, were more encouraging. In particular, Australia recorded the first current account surplus since 1975, supported not least by the temporary surge in iron ore prices that quarter, which has subsequently reversed. But even when adjusting for price effects, the export performance was still better, with export volumes rising 1.4%Q/Q, underpinned by a pickup in goods exports to the strongest quarterly growth for five quarters. And with import volumes down for the second successive quarter and by 1.4%Q/Q, today’s figures imply that net trade provided a positive contribution to Q2 GDP growth of a sizeable 0.6ppt, up from 0.2ppt in Q1 and the strongest since Q116. This notwithstanding, data published yesterday implied much weaker inventories and investment in Q2, while retail sales were also soft last quarter. As such, tomorrow’s GDP figure still looks set to fall well short of the RBA’s implied growth forecast of 0.8%Q/Q.

The start of the third quarter has also brought some softer retail sales figures, with the value of sales in July falling (-0.1%M/M) for the first month in three to leave them up just 0.3%3M/3M, the weakest such growth since October 2017. Department stores sales were down for the third consecutive month, while spending on clothing and at cafes/restaurants fell for the first month in three. In contrast, spending on household goods posted a modest rise for the third consecutive month.

Euro area:
It should be a relatively quiet day for euro area economic news today with just euro area PPI figures for July and Spanish unemployment numbers for August due for release. The Spanish figures, just released, reported a notable (but not unexpected) increase in registered unemployment last month, up 56k on the month, the first rise in six months. But this principally reflects seasonal effects. Indeed, seasonally adjusted figures showed that the number of people employed in Spain increased for the eleventh consecutive month in August, to 19.3mn, an increase of around 500k over the past year and more than 3mn higher than the trough six years ago.

In the US, meanwhile, today will bring the manufacturing ISM and final Markit manufacturing PMI for August. The headline ISM is expected to have moved sideways at 51.2, while the PMI is expected to signal stagnation in the sector, with the index at 50. This afternoon will also see US construction spending figures for July released.


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