RBA leaves policy unchanged, while leaving door open to further easing

Chris Scicluna
Emily Nicol

‘Risk on’ as Trump leaves hospital, US fiscal stimulus seen back on track, data also impress
Equity markets got off to a very positive start to the week on Monday. Following gains in Asia and Europe, Wall Street went on to close near session highs with the S&P500 gaining 1.8% and the Nasdaq an even more impressive 2.3%. While a stronger-than-expected services ISM reading certainly didn’t hurt – the headline index rising to a 19-month high – markets appeared to have taken most heart from the improving health of President Trump, who returned to the White House later in the day. Investors appeared to conclude that this might improve the odds of Congress coming together to pass a further fiscal stimulus bill ahead of the election. And with polls showing that Democrat challenger Joe Biden has widened his lead over Trump since the first Presidential debate, investors may also have increased their expectations regarding the prospects for stimulatory fiscal policy beyond the election too. Indeed, the most interesting move on Monday was in the Treasury market, where the recent slumber was disturbed by a 6bps lift in the 10Y yield to 0.78% – a level not seen since early June. Meanwhile, reduced risk aversion was also reflected in weaker demand for the greenback and the yen.

Against that background, and with US equity futures holding their ground, most equity markets across the Asia-Pacific region have made further headway today (China’s markets remain closed for its Golden Week holiday). In a day devoid of local data, Japan’s Topix increased about ½% while the 10Y JGB yield nudged up 1bp to 0.03%. Slightly larger gains were seen in Hong Kong and Taiwan. In Australia the ASX200 underperformed somewhat as ACGB yields moved sharply higher in lockstep with US Treasuries. After some initial volatility, there was no sustained reaction to news that the RBA had maintained all of its policy settings unchanged while leaving the door open to further policy easing at a later point. Australian investors are now awaiting the handing down of what is widely expected to be a very expansionary federal Budget, which will be presented at 7.30pm AEDT (9.30am BST). In the euro area, Bunds and other euro area govvies are a touch firmer this morning despite some stronger-than-expected German factory order data (see below).

German factory orders surge
In contrast to yesterday’s services PMIs – which signalled a loss of momentum in the sector across the euro area’s member states – the manufacturing PMIs suggested that the recovery in that sector, particularly in Germany, remained intact at the end of Q3. And today’s German factory orders data further supported this view. Coming on the back of an upwardly revised increase in July (3.3%M/M), orders rose a stronger-than-expected 4.5%M/M in August, taking the cumulative rise since April to more than 50%. Admittedly, given the plunge at the start of the pandemic, the level of orders was still more than 3½% lower than the pre-crisis peak and 2.2% down from a year ago.

Within the detail, the recovery continued to be driven by overseas orders (6.5%M/M) and underpinned by demand from elsewhere within the euro area (14.6%M/M) – indeed, orders to euro area countries were now more than 6% higher than the pre-pandemic level – while those from other countries rose a more modest 1.5%M/M. In contrast, despite rising in August (1.7%M/M), domestic orders were still down more than 6½% from February’s peak, perhaps somewhat surprisingly so given the six-month VAT cut implemented in July.

At the sectoral level, the recovery appeared broad based in August, with orders of intermediate, capital and consumer goods all up more than 4%M/M, although domestic orders for capital goods bucked the trend to record the second successive drop in August. And new domestic orders in the car industry fell back too (down 5.0%M/M). But this follows strong growth over recent months and total auto orders were still up more than 4%M/M to leave them just above the pre-pandemic level. With most leading indicators for the sector, such as the German manufacturing new orders PMI (which surged to 64.2 in September), pointing upwards, we expect growth in total factory orders and production to be sustained over coming months.

This notwithstanding, today’s manufacturing turnover figures – which often correlate with IP data (due tomorrow) – were disappointingly subdued, down 0.1%M/M in August. Admittedly, this follows particularly strong growth over recent months to have recovered roughly two-thirds of the initial post-pandemic slump. But it nevertheless suggests that there are some downside risks to tomorrow’s forecast rise in IP of 1½%M/M.

RBA leaves policy settings unchanged as expected, leaves door open to further easing
At today’s meeting the RBA’s Board elected to retain its key policy settings i.e. the 0.25% target for both the cash rate and 3-year bond yield. And after expanding its Term Funding Facility to help support lending by banks at last month’s meeting, this element of the Bank’s coronavirus response was also unchanged this month. This outcome had come to be widely expected by the market, reflecting some better-than-expected local data – especially in the labour market – and the more promising trend in coronavirus case numbers in the state of Victoria. And with the federal Government due to release its Budget in just a few hours – one that is expected to feature accelerated personal tax cuts and increased spending – the RBA’s Board were also likely keen to factor in reaction to the Budget measures in the updated economic forecasts that will underpin the Board’s next meeting on Tuesday 3 November (and which will be published in the updated Statement on Monetary Policy at the end of that week).

Turning to the Governor’s post-meeting statement, not surprisingly the Bank’s Board again pledged not to increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band. And with the Board adding that it views addressing the high rate of unemployment as an important national priority, it was stated that the Board “…continues to consider how additional monetary easing could support jobs as the economy opens up further.” The latter wording might also suggest that the Board felt that further easing would have more impact once restrictions are further eased in Victoria. In any case, for now the Board seems content with the present policy package which is said to be “working as expected” and underpinning very low borrowing costs and the supply of credit to households and businesses.

As far as the economic outlook is concerned, the Bank described the global economy as gradually recovering but again noted that it is uneven and dependent on containment of the virus. Domestically, it was noted that a recovery is now under way in most of Australia – with the obvious exception of Victoria – but that too is also likely to be bumpy and uneven. Importantly, given the Bank’s dual mandate, it was noted that the unemployment rate is likely to peak at a lower rate than earlier expected. However, the Bank still expects that unemployment rate will remain high for an extended period, so that wage and inflation pressures are likely to remain very subdued.

The Bank will publish its six-monthly Financial Stability Review on Friday, providing more detail on how the financial system is coping with the challenges posed by the pandemic. The following Friday Governor Lowe will give a speech to an investor conference. Together with the release of the minutes from today’s meeting on 20 October, Lowe’s speech is likely to be analysed especially closely for clues regarding the likely outcome of the Board’s November meeting.

Australian trade surplus narrows in August as gold exports fall from record level
Turning to the day’s data flow, the main focus in Australia was on the full trade report for August. This report revealed a smaller-than-expected surplus of A$2.6bn during the month – down A$2bn from the previous month and the smallest surplus since October 2018. This narrowing was mostly due to a further 4.2%M/M decline in exports, raising the annual pace of contraction to 21.9%Y/Y from 21.3%Y/Y in July. That said, imports did grow an unexpected 2.1%M/M in August, lowering the annual decline to 14.6%Y/Y from 16.9%Y/Y previously.

In the detail, a 4.5%M/M decline in exports of goods was driven by a 62%M/M slump in shipments of non-monetary gold. These exports are very volatile from month to month and had increased to an exceptionally high level in July. This movement swamped the impact of a 2.6%M/M increase in shipments of non-rural goods – metal ores and core both rising during the month – and a 12.4%M/M rebound in shipments of rural goods (which had been soft in July). Exports of services fell just 2.6%M/M in August but were down 40.2%Y/Y, reflecting the collapse of tourism receipts.

Imports increased 2.1%M/M in August, led by a 6.3%M/M increase in consumer items. Indeed, consumer imports are now up 6.1%Y/Y, marking the first time this year that annual growth has been positive. Of particular note was an increase in imports of non-industrial transport equipment. After rising sharply in July, capital imports fell 6.9%M/M but were still up 2.7%Y/Y. Imports of intermediate goods increased 3.4%M/M due to higher shipments of fuel, but nonetheless remained down 8.3%Y/Y. Imports of services rose 1.2%M/M but remained down 57.8%Y/Y, with the latter reflecting the virtual absence of outbound tourism.

Australian job ad rebound continues in September, consumer confidence edges higher
In other news, the ANZ job ads index rose a further 7.8%M/M in September. Whilst this amounted to a fifth consecutive monthly increase, with advertising having halved in April alone, the number of ads remained down 24.8%Y/Y. Meanwhile, the Roy Morgan measure of consumer confidence rose 0.7pts to 95.7 last week, marking the best reading since the middle of June.

European construction PMIs also due for release
Construction PMIs for September are also due to be published shortly and consistent are expected to point to ongoing subdued activity in the sector across the euro area. Meanwhile, the UK construction survey is expected to point to continued growth in the sector in September, contrasting with the message from yesterday’s services PMI which implied a loss of momentum last month. In addition, we will hear from ECB President Lagarde and Chief Economist Lane, who are both scheduled to speak publicly.

Fed Chair Powell scheduled to speak at a conference
The highlight today is likely to be Chair Powell’s address on the economic outlook to the NABE conference in Chicago, although we imagine Powell’s comment won’t depart from his recent script. Data-wise, we will receive the trade balance and JOLTS reports for August. The previously reported goods trade figures showed a widening in the trade deficit as the recovery in imports continued to outpace that of exports. And with travel restrictions still in place, prospects of a meaningful pick up in services exports and imports are unlikely.

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