A quiet week after a cold shower by employment data

Many were expecting a rate cut from FED in March and were disappointed with Governor Powell remarks of a cut in March not likely and bathed with cold US employment data. Since then, markets have pushed back on their expectations. The main event for this week thus far was the RBA monetary policy meeting.

In this article:

1.       RBA holds rates steady

2.       When to expect RBA to Cut rates

3.       Is there a new theme in the market?

RBA holds rates steady

Reserve Bank of Australia kept its policy rate unchanged. Stating that they have made good progress with inflation as it keeps coming lower and lower. The Governor – Michele Bullock – said that policy

rate is and must be kept at the restrictive level as to ascertain that inflation figures that come will be to the satisfaction of all.

Consumers are expressing concerns with current level of policy rates and with China´s economy in the mud, it does not paint a good picture going forward. Bullock mentioned that RBA has taken into consideration the Chinese situation and that it is imbued in their projections.

Data released earlier this week showed that Australia had a trade surplus for December, a surplus of AUD 10.96 billion which was close to expected figure of AUD 11.76 billion. China – the country´s biggest trade partner, contributed 6.9% MoM to a nine-month high of AUD 18.51 billion. Non-monetary Gold was the biggest contributor to this outflow. Balance of trade is forecasted to end the year around the figures of AUD 8-9 billion and trend around AUD 11-13 billion in 2015, partially reflecting China´s economic activity.

Bullock was asked to comment the implication of a fiscal policy tool – tax cut – on inflation and demand, she answered by saying that the amount of money in the fiscal envelope is the same, and that which differs is how it is being distributed to households. Thus, she believes it will not have any severe implication to RBA forecasts – the level of tax cut implemented will not have severe implications on projected inflation.

When to expect RBA to Cut rates

The key to figuring out when the appropriate time is, is not to focus solely on inflation components as officials are saying. It is to also know when the FED will cut rates.

Should RBA cut rates faster than FED, that will depreciate further the AUD$ against its peers by creating an outflow of AUD$ seeking higher yielding currencies. And weaker currency contributes greatly to higher inflation. Interim, Australia is in a sticky situation as its biggest trading partner being in the mud, thus unable to fully provide the demand needed for Australian economy.

RBA is focusing on reaching a state of balance where inflation is slowing while maintaining the unemployment levels. The key to that, Bullock said, is to keep policy rate at appropriate restrictive levels while keeping long-term inflation expectation levels anchored. Markets are currently pricing in a 0.30% cut from RBA by year end.

Is there a new theme in the market?

Markets are currently questioning whether the current level of FED policy rate is actually restrictive enough given the strong employment data printed last Friday. That upside surprise in data was a complete shock to markets which were expecting a March cut from the FED, almost like a cold shower to calm the markets down.

The FED and the RBA are both data dependent, they are focusing on inflation figures to ascertain whether inflation is actually in the projected path to targeted level. But the surprise in US job data should be followed by strong inflation data next week. Otherwise, last week´s data will go off as a typical December cyclical data reflecting huge holiday season purchases.

Investors are currently mimicking central bank with their “wait and see approach” until next week´s US data.

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