Last week we wrote about the need to look for clearer signs of Australia’s economic growth prospects before it would be possible for the RBA to change the longstanding 1.50% official cash rate. The minutes of the RBA’s 2nd April monetary policy meeting were released last week and seemed to refine further what the RBA would need to see to consider a cut in the official cash rate – a material lift in the unemployment rate and evidence that inflation is likely to stay lower for longer than previously expected. Our view is that neither of these conditions – and it will require both conditions to occur for the official cash rate to be cut – are likely to occur in 2019.
Before looking at why the unemployment rate is unlikely to rise materially and annual inflation is unlikely to stay as low as it has been over the past year it is also worth considering the economic information that was available to the RBA board at the time of the 2nd April policy meeting that would have influenced its discussion. It is worth keeping in mind that the minutes of the meeting were a true record of the discussion at that meeting and cannot to be altered to include information available after the meeting. In short, the minutes reflect information about the global and domestic economies available up to 2nd April, not up to 16th April when the minutes were released.
It is fair to say that the period between 2nd April and 16th April contained mostly better-than-expected economic data releases for key overseas economies such as the US and China and relating to the Australian economy as well. Just to mention a few in the US March non-farm payrolls rebounded strongly, up 196,000 and weekly initial jobless claims dived to near 50-year lows below 200,000 holding the promise of more strong non-farm payroll reports over coming months. China’s economic data readings for March improved more-than-expected almost across the board but with the most notable improvement in exports +14.2% y-o-y; industrial production +8.7% y-o-y; and retail sales +8.7%. China’s Q1 GDP was also stronger-than-expected +6.4% y-o-y. In Europe, one of the great risks worrying the RBA, Brexit, was delayed from imminent potential crash out to another 6 months of negotiations.
In Australia, all data readings released between 2nd April and 16th April were stronger-than-expected including February international trade, a new record monthly trade surplus of $A4.8 billion; February retail sales +0.8% m-o-m (well above +0.3% consensus forecast) and February housing finance commitments for owner-occupiers +2.0% m-o-m (again much better than market consensus forecast of -2.0%).
Even if the RBA board had the advantage of seeing the data released through to the 16th April the tenor of their discussions might not have changed much other than that they might have been encouraged that both the global and Australian economies might be showing tentative signs of improvement. That would probably mean that the threshold to consider lowering the cash rate will require very convincing evidence that the unemployment rate is rising materially, and that inflation is staying down.
The latest labour force report for March released last week shows no evidence of a sustained lift in the unemployment rate. It is true that the national unemployment rate edged up to 5.0% from the eight-year low 4.9% reported the month before, but only because the labour force participation rate rose a notch to a record high 65.7%. Essentially, the national unemployment rate has moved within a tight range of 4.9% to 5.1% over the past 6 months. A material lift in the unemployment rate would require a sustained lift above 5.1%, probably pushing up in to 5.5 to 6.0% range.
At this stage, employment growth remains far too strong for the unemployment rate to rise sustainably. Record high job vacancies (245,300 in Q1 2019 and up 9.9% y-o-y) point to more strong employment growth over coming months. Employment rose by 25,700 in March above the market consensus forecast of +15,000. Impressively the rise in full-time employment was much bigger than the rise in total employment, up 48,300 in March. The rise in full-time employment has been much stronger in the first three months of 2019 +111,800 compared with the last three months of 2018 +32,700 a sign that that the labour market is gaining strength, not losing power and a good reason to expect the unemployment rate to hold down, not start to rise.
As far as annual inflation is concerned, while it continues to hold below the RBA’s 2-3% target band (headline CPI 1.8% y-o-y in Q4 2018) there was a flicker of life in the last Q4 reading when the quarterly change +0.5% q-o-q came in above consensus forecast for the first time in two years. The Q1 CPI is due tomorrow and the market consensus forecast is only +0.2% q-o-q, +1.5% y-o-y caused mostly by a stepping down petrol prices in the quarter. There are also some inflationary factors that seem to have been downplayed in the consensus forecast. Some fresh food prices lifted because of the drought and subsequent floods in far North Queensland. Import prices have been rising for some time and back in Q4 2018 were up 0.5% q-o-q, 7.8% y-o-y. Also, while wages growth has been low it has been building a margin above the inflation rate.
There is a risk that the Q1 headline CPI will come in above consensus for a second consecutive quarter. Even if it does not there are identifiable inflationary pressures (drought/flood effect; higher petrol prices in Q2; rising import prices; and slow climb in wages) working to make the Q2 2019 CPI higher than in Q1. It is unlikely that annual inflation will continue to decline or even hold down at the low annual rate likely to be registered tomorrow.
In our view there are three strong reasons why the RBA is unlikely to deliver rate cuts this year. The first reason is that a positive turn in the run of economic data means that global and local economic prospects seem a little better than when the RBA board met at the beginning of April. The second reason is that the Australian unemployment rate is unlikely to rise consistently into territory that might prompt the RBA to cut the cash rate. The third reason is that annual inflation is unlikely to stay as low as it has been. Our view remains that the cash rate will stay at 1.50% through 2019 and extending in to 2020