For a more comprehensive round up of the week, listen to Stephen’s full report here.
The Reserve Bank faces conflicting information relating to the strength of the Australian economy. March employment growth (+37,700) was much stronger than expected and so too was February employment growth (+41,900) after a hefty upward revision in the latest data. The unemployment rate has been on a gentle decline early in 2015 (6.3% in January down to 6.1% in March) again, against general expectations of the opposite occurring. Latest readings of job vacancies (both the ABS quarterly survey and the monthly ANZ job advertisements series), however, have taken a weaker turn, a hint that the latest strength in the labour force survey may not persist.
Monthly indicators of business and consumer sentiment are also tracking in opposite directions. The March NAB surveys of business confidence and business conditions both showed moderate improvement to +3 and +6 respectively, markers of a small majority of business respondents expecting and reporting improvement. In contrast, consumer sentiment has worsened in March (down 1.2%) and April (down a further 3.2%) according to the monthly Westpac survey. Interestingly, actual retail sales improved a little in February – up 0.7% – after increasing 0.5% in January.
The storm clouds gathering over the mining sector continue to darken; notably, over iron ore mining, where the falling price of ore has caused activities at one of the smaller Western Australian mines to be suspended. Softer economic growth in China and economic rebalancing towards activities that consume little or almost no mineral commodities means that Australian mining activity will continue to face adverse market conditions for at least the next year or two.
On the stronger side of the economic growth ledger, housing activity continues to rise, although the strength is becoming more narrowly based in Brisbane, Melbourne and Sydney. Housing finance commitments at the leading edge of housing activity are showing signs of topping out. The value of investor housing finance commitments edged down in January and fell a surprising 3.4% in February.
This week, the Q1 CPI will be published and, on the market, consensus forecast will rise only around 0.2% q-o-q reducing the annual inflation rate to 1.3% y-o-y from 1.7% y-o-y in Q4 2014. The annual inflation rate has been falling much faster than the RBA has been reducing the cash rate. As a consequence, the real (after inflation) cash rate has risen sharply over the past year from -0.3% in April 2014 (when the nominal cash rate was 2.50% set against Q1 2014 CPI inflation of 2.8% y-o-y), to +0.95% in April 2015 with a cash rate of 2.25% set against Q1 2015 CPI inflation of 1.3% y-o-y (if the market consensus forecast is correct).
Australian real short term interest rates have also risen relative to international real short term rates; this is considered to be one reason why the Australian dollar has not depreciated as far as collapsing Australian export prices have indicated that it should have.
The RBA faces a monetary policy conundrum in early May. The economy is showing mixed-strength signals although there is probably not enough change for the better for the RBA to change its relatively dour low-growth/low-inflation forecasts produced as part of its last quarterly Monetary Policy Statement back in February. There is still a good case to provide more monetary policy support for the economy. Moreover, the additional support provided by the 25bps cash rate cut to 2.25% back in February would seem, in hindsight, to have been too little, especially when considered in real terms allowing for falling inflation.
Another marker that the RBA needed to cut the cash rate more is that the Australian dollar has actually appreciated slightly against the US dollar as well as on a trade weighted basis since the cash rate cut in early February and despite further sharp falls in the iron ore price over the same period.
In the wake of the stronger than expected March labour force report, the market has reduced the probability of a cash rate cut in May. Our view is that other factors such as inappropriately rising Australian real short term interest rates and the recent stability of the Australian dollar in the face of further sharp falls in coal and iron ore prices, still make the May RBA policy meeting very much a live meeting for another cash rate cut.