RBA Preview: what to expect from this week’s RBA meeting
The market is expecting no change to interest rates. The cash rate will remain on hold at the record low of 1.00 per cent, with markets implying a less than 10 per cent chance that rates will be cut by 25 basis points.
When is the RBA meeting?
This month’s RBA meeting will occur on Tuesday, September the 3rd at 2.30PM (AEST).
The economic data that matters:
Wages Growth (YoY)
Retail Sales (YoY)
What are the key themes to watch out of this RBA meeting?
What’s domestic growth doing?
Quarterly GDP data is released a day after the RBA’s meeting, and if economist estimates are any guide, will show, at 1.4 per cent, the weakest rate of annualized growth in the Australian economy since 2011. The economy seems to be facing several significant headwinds. Firstly, the Australian consumer has long been in a tough spot, weighed down by the effects of high levels of private debt, as well as years of sluggish wages growth. Secondly, after last week’s slew of weak business investment data, there are increasing signs that business activity in the country is slowing down too. Markets will be listening attentively to RBA’s commentary on this unfolding dynamic, and whether this rises the odds of more aggressive monetary policy in the near-future.
What about the trade war and the global economy?
So enmeshed is the Australian economy with that of the rest of the world’s, market participants will be looking to qualify what impact the recent escalation in the US-China trade-war, and what appears to be a major slowdown in the global economy, will have on domestic economic activity. The key concept will be “uncertainty”. To what extent is global economic uncertainty stopping Australian consumers from consuming? To what extent is global economic uncertainty stopping Australian business from investing? Of course, the RBA has little control over how the trade-war unfolds. But markets will be gauging how the RBA intends to tackle its worst effects – including, but not limited to, the possibility of “unconventional” monetary policy measures down the line.
What is the market expecting at this RBA meeting?
The market is expecting that this meeting will contain no change to interest rates. The cash rate will remain on hold at the record low of 1.00 per cent, with markets implying a less than 10 per cent chance that rates will be cut by 25 basis points. So: it’s going to be one of those RBA meetings centred on the central bank’s commentary. Given the continued deterioration in US-China trade relations, as well as the release of what’s expected to be a soft GDP release a day after the bank’s meeting, interest will be skewed towards understanding the RBA’s view on how a more uncertain global growth outlook could impact a sluggish Australian economy.
How could the RBA meeting impact the financial markets?
The core question for interest rate markets pertains to whether the RBA cuts one more, or two more times in 2019. As it stands, the market is pricing in a full cut by year end – which will, on the balance of probabilities, come in October. From there, the markets think another cut will probably come after that in December. However, that view is hardly overwhelming. The chances of 50 basis points of cuts from the RBA before year end currently sits as a roughly sixty-forty proposition. The outlook is highly variable, and depends on the RBA’s forward guidance at this meeting. A dovish RBA could be the difference between the market expecting a cash of 0.50 per cent, or 0.75 per cent, by year end.
There’s little love being shown towards the Australian Dollar recently. Caught between fears about the trade-war, and expectations of further RBA rate cuts, the AUD/USD has plumbed new decade lows in the month of August. Though certainly prone to short-term pops higher – the 200-day EMA remains a level the currency is drawn to in periods where positive sentiment enters the market – the trend in the bigger picture for the AUD/USD is undoubtedly to the downside. This is even despite the “short-Aussie” trade become increasingly crowded. Overall: out of this RBA meeting, firm signalling that the RBA is poised to move next in October could be the catalyst to push the Aussie Dollar back into the 66-cent handle, and to fresh decade-long lows.
The prospect of looser monetary policy has sustained strength in Australian equities, despite what might be best described as “lukewarm” fundamentals. Valuations are stretched and are being supported in a big way by lower risk-free rates. The local reporting season also just finished up and showed quite modest earnings growth across the ASX in the last half. There are pockets of relatively strong performance within the ASX right now – and that strength can be heavily attributed to the RBA’s policy settings. The Real Estate sector has performed solidly in the past 3 months, as have consumer-sensitive stocks. Investors will be looking to continue to ride these trends into the end of the year – provided of course, that the RBA sustains its clearly dovish position.
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