RBA leaves policy settings unchanged

Chris Scicluna

Wall St posts modest gain; Japan/China remain closed; Aussie bonds unmoved by more upbeat RBA
After threatening to set a new high in early trade, the S&P500 pared its gains to close up 0.3% yesterday while weakness in the tech sector left the Nasdaq down 0.5%. News from the manufacturing sector was less buoyant than expected, with the ISM’s manufacturing index falling 4.0pts from last month’s near four-decade high to a still very solid 60.7 in April, with another high supplier-deliveries reading and the highest prices-paid reading in more than a decade pointing to ongoing production bottlenecks. The Treasury market finished somewhat firmer too, with the 10Y yield slipping 2bps from Friday’s close to 1.60%. In a speech, Fed Chair Jay Powell emphasised that the gains from the economic recovery remained uneven, and much slower for those in lower-paid jobs. And the NY Fed’s John Williams noted that US growth this year was likely to be the fastest in decades, but opined that “we still have a long way to go to achieve a robust and full economic recovery” and emphasised that “the data and conditions we are seeing now are not nearly enough for the FOMC to shift its monetary policy stance”. In the FX market, the greenback erased most of the gains that it had made on Friday.

Turning to the Asia-Pacific region, markets remained closed for national holidays today in both Japan and China (both will reopen on Thursday). So, on a quiet day for local news, most interest centred on Australia where the RBA left its policy settings and forward guidance unchanged, with a sharply lowered baseline track for the unemployment rate leading to only a slight firming of the Bank’s outlook for inflation (more on the RBA below). With the Aussie bond market well attuned to the RBA’s dovishness, the RBA’s headlines had little impact on ACGB yields, which finished slightly lower in response to the overnight decline in UST yields. However, the ASX200 closed up 0.6% on a day when those other markets that were open were mostly little changed. One notable exception was Taiwan, where the weakness in tech stocks saw the previously well-performing TAIEX fall 1.7%.

RBA leaves policy settings unchanged; revises growth outlook and inflation outlook up, unemployment outlook down, but holds to view that rates likely on hold until 2024
As was widely expected, today the RBA’s Board elected to keep all of its policy settings unchanged at this month’s meeting. So the Bank’s cash and 3-year bond rate targets once again remained at 0.1%, the parameters of the Term Funding Facility were unchanged and the Bank’s government bond purchase programme remained capped at last month’s expanded A$200bn. The Bank advised that at its July meeting the Board will consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond (given the steadily improving outlook we expect the Board will opt for the former). At that meeting the Board will also consider whether there will be further government bond purchases made following the completion of the current programme in September. However, it noted that with financial markets functioning well it is not considering a further extension of the Term Funding Facility, which will therefore expire as scheduled at the end of June.

Of most interest in the post-meeting statement was the Bank’s summary of its revised baseline economic outlook, which will be elaborated on in more detail on Friday when the Bank releases its quarterly Statement of Monetary Policy. With the Bank citing a strong global growth outlook and upside surprises at home, the new baseline forecast for GDP growth this year is 4¾% – an upward revision of 1¼ppts. Off that higher base, unchanged growth of 3½% is forecast in 2022. As a result, the Bank now forecasts that the unemployment rate will end this year and next at 5% and 4½% respectively – in both cases 1ppt lower than forecast in February. However, these latest upgrades have once again had very little payoff in terms of raising the outlook for inflation. While annual CPI inflation will rise above 3% in Q2 due to base effects, annual underlying inflation is forecast to be 1½% at the end of this year before rising to 2% by mid-2023 – in each case just ¼ppt firmer than forecast previously (and so still not comfortably within the Bank’s 2-3% target range within the forecast horizon).

As a result, despite this upgraded outlook, the Bank’s forward guidance regarding the outlook for interest rates was unchanged. Specifically, it remains the case that the Board thinks that the conditions required to prompt a rate hike are unlikely to be met “until 2024 at the earliest”, albeit a view that will surely soon be pressured if forecast upgrades continue at anything like recent pace. As before, the Board stated that it will not increase the cash rate until actual inflation is sustainably with the 2-3% target range, and noted that this will likely require a tight labour market and materially higher wage growth. With yesterday’s ANZ jobs ads series pointing to the highest level of advertising since 2008, further positive surprises in the labour market are certainly possible in our view.

Aussie trade surplus narrows in March; investor housing loan growth jumps in March
Turning to today’s Australian economic releases, the main report of note was the full (goods plus services) trade balance for March. The ABS reported that Australia’s trade surplus narrowed by $A2.0bn to A$5.6bn in March, which caught the market by surprise even though a narrowing had been well signalled by the preliminary merchandise trade data released last month. Overall exports declined 1.7%M/M with a modest lift in exports of non-rural goods dominated by a 25%M/M slump in exports of non-monetary gold (which varies widely from month to month). So coming off an unusually high base in March last year, exports were down 5.6%Y/Y – a result that largely reflects a 29.2%Y/Y decline in exports of services due to the absence of foreign tourists. Exports increased 5.4%Q/Q in Q1, but this growth is more than explained by the surge in exports prices during the quarter. Meanwhile, imports increased 4.3%M/M in March and so were up 5.7%Y/Y. The growth during March was mostly due to increased imports of intermediate and capital goods and non-monetary gold. However, the annual growth mostly reflects near 20%Y/Y rebounds in imports of consumption and capital goods, partly offset by a 32%Y/Y decline in imports of services. Imports increased 3.4%Q/Q in Q1, which appears to mostly reflect an increase in volumes. As a result, net exports appear likely to have made a large negative contribution to GDP growth in Q1.

In other news, the ABS reported that the value of new housing loan approvals increased a strong 5.5%M/M in March to a new record high, lifting annual growth to a whopping 55.3%Y/Y. Of particular note this month, approvals for investor loans increased 12.7%M/M and 54.3%Y/Y – continuing a recovery from what had been 20-year lows – while approvals for owner-occupier loans increased 3.3%M/M and 54.3%Y/Y. Meanwhile, the ANZ Roy Morgan consumer confidence index was again little changed last week, increasing a modest 0.3%M/M to 112.7 and so remaining just below last month’s post-pandemic high.

Trade and factory orders data ahead in the US today; another big day of corporate reporting
Today the US will report the full trade balance and factory orders reports for March, neither of which is likely to move markets – especially with investors focussed on the payrolls data that will come at the end of this week. The already-released preliminary merchandise trade data points to a significantly wider deficit this month. And so with the services surplus likely to have eroded too, Daiwa America Chief Economist Mike Moran expects the full goods and services deficit to have widened by $3.9bn to a record $75.0bn. Meanwhile, Mike expects the already reported 0.5%M/M lift in orders for durable goods to be joined by a 1.5%M/M lift in bookings for non-durables – partly due to higher prices for petroleum – leading to a 1.0%M/M increase in overall factory orders. Aside from the economic data, another busy day of corporate reporting also looms and there are several Fed speaking engagements too.

UK bank lending data and final manufacturing PMIs due this morning
Following yesterday’s bank holiday, this week’s UK data calendar gets underway today with the latest BoE bank lending figures for March. In February, households continued making net repayments of consumer credit, while borrowing for house purchase remained elevated. Today also brings the release of the final manufacturing PMIs for April. According to the flash estimates, the recovery in manufacturing output (which has up to now lagged that in the euro area this year) accelerated, with the respective PMI up to 59.1, an eight-month high albeit lagging the equivalent services PMI for the first time during the pandemic.

A quiet day ahead for euro area data after ECB yesterday revealed higher pace of PEPP purchase in April
Today should be relatively uneventful for European economic data. While the ECB will publish the breakdown between gross purchases and redemptions of its €19bn of net PEPP purchases settled last week, that will be of second-order importance as we appear now to have greater clarity on the ECB’s intentions for the pace of purchases to be conducted during the current quarter. Overall, the bank bought a net €80bn of PEPP assets in April, up from the monthly average of €60bn in the six months ahead of the 11 March Governing Council meeting when the policymakers decided to accelerate the pace of purchase during the current quarter. We should expect the ECB to continue to buy PEPP assets at that €80bn monthly pace ahead of the 10 June meeting.

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