RBA appears in no hurry to ease

Emily Nicol
Chris Scicluna

The news flow related to the coronavirus remains grim, with the number of cases now above 20,600 and confirmed deaths up to 427 (including a first in Hong Kong). And the economic impact appears to be mounting with, for example, China’s Passenger Car Association today predicting a record drop in auto sales in the first two months of the year of between 25-30%. Nevertheless, following yesterday’s plunge, Chinese stocks rebounded somewhat today, responding positively to extra liquidity from the PBoC, a decision to set the daily fixing for CNY stronger than 7/$, and no doubt also buying by the ‘national team’. The CSI300 eventually closed up 2.6% on the day, albeit leaving it still down 7.6% in the year-to-date.

Against that backdrop , and a dearth of economic news elsewhere in the main Asian economies, other major stock markets in the regions were also stronger today, albeit with the gains somewhat less impressive. So, for example, the Hang Seng closed up 1.2%. And while the yen depreciated back through 109/$, Japan’s TOPIX closed up 0.7%.

Meanwhile, continued lack of clarity over the result of the Iowa caucus meant that US politics failed to influence the mood one way or the other. And so, in the bond markets, USTs responded to the improved risk appetite by slipping back somewhat, with 10Y yields back up about 4bps from late yesterday to above 1.56%, close to the high reached after yesterday’s improved US manufacturing ISM survey. With Governor Kuroda predictably telling the Diet that the BoJ is ready to react with easier policy if the coronavirus takes its toll on Japan’s economy, JGBs were only modestly weaker across the curve, while the latest 10Y auction met with decent demand. Yields on euro govvies are higher across the board, however, e.g. with yields on 10Y Bunds up 2bps to -0.425%. And ACGBs were weaker at the short end of the curve (2Y yields up 2½bps to 0.65%) after the RBA left its cash rate unchanged at 0.75% and suggested that it was in no hurry to ease policy further. See more on this below.

As had been widely anticipated after some recent better-than-expected domestic data, the conclusion of the RBA’s latest policy meeting today saw the cash rate left unchanged at a record low of 0.75%. Perhaps inevitably, Governor Lowe’s policy statement maintained an easing bias. But adding that rates had ‘already been reduced to a very low level’ and ‘recognising the long and variable lags in the transmission of monetary policy’, he also suggested that the RBA is in no hurry to adjust policy. And that is despite the new uncertainties generated by the bushfires and coronavirus, which Lowe acknowledged would ‘temporarily weigh on domestic growth’.

While the full Monetary Policy Statement (due Friday) will provide more detail on specific forecasts, the RBA has maintained its broadly upbeat assessment for GDP this year, expecting growth of around 2¾% in 2020, before picking up to 3% in 2021, supported by the continued low interest rate environment and recent tax refunds, as well as perceptions of a brighter outlook for the resources sector and anticipated recovery in residential construction.

For the time being, of course, the coronavirus is considered by the RBA merely to be a downside risk. And, of course, Australia’s economy was relatively immune to the SARS infection in 2002/3, with studies suggesting that Australian GDP growth was probably reduced by just 0.1ppt in 2003. But the importance of China as a trading partner has increased astronomically since then, particularly in the mining sector (which accounts for almost 10% of Australia’s total output). Indeed, Australian exports to China now account for almost 40% of the total, more than four times the share at the time of SARS. And they are now worth more than 2½% of GDP (compared with less than ½% in 2003).

But even assuming the broadly positive growth outlook envisaged by the RBA’s central scenario, price pressures are likely to remain subdued, not least as spare capacity in the labour market will persist. Indeed Lowe restated his mantra that a further gradual improvement in wage growth is required for inflation to return sustainably within the 2-3% target range. And as such, the Bank continues to forecast headline and core CPI to fall slightly short of the target range over the horizon, suggesting that further easing will be required in due course. Indeed, we continue to expect the RBA to cut rates by 25bps this year, but quite possibly not until the second half of the year once fiscal policy, as well as the impact of the bushfires and coronavirus, will be clearer.

It should be a relatively quiet day for European top-tier releases, with euro area PPI figures for December to be accompanied by preliminary Italian CPI numbers for January. These are expected to show that the annual rate of decline in euro area PPI inflation moderated at the end of last year on the back of energy prices. Headline Italian CPI inflation, however, is likely to have moved sideways at just ½%Y/Y. Turning to the UK, after yesterday’s final manufacturing PMI was revised slightly higher in January to suggest stagnation in the sector having been contracting since last April, today’s construction PMI will likely tally with increasing signs of stabilisation in the housing market, with the headline index forecast to rise to an eight-month high.

Finally in the US, today will bring revised durable goods figures for December. These are likely to confirm the near-2½%M/M increase seen in the preliminary release on the back of a jump in bookings for defense-related aircraft and miscellaneous transportation items. Indeed, excluding transportation, durable orders were broadly flat on the month. Orders for non-durable items are expected to have increased at a more moderate pace than durable items, leaving total factory orders up a little more than 1%M/M.

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