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RBA Preview: what to expect from this week’s RBA meeting

Market pricing right now suggests a slim 10 per cent chance that the RBA will cut for a third-month in succession.

When is the RBA meeting?

This month’s RBA meeting will occur on Tuesday, August the 6th at 2.30PM (AEST).

The economic data that matters:

GDP (YoY)

Unemployment Rate

Wages Growth (YoY)

CPI (YoY)

Retail Sales (YoY)

1.8%

5.2%

2.3%

1.6%

2.5%

What are the key themes to watch out of this RBA meeting?

1. The domestic data

The Australian economy remains in a soft position. Growth is well below trend. Inflation is sluggish – and only increased recently because of a lift in global energy prices. And that all-important issue of “spare capacity” in the labour market is far from being resolved. The consensus is looser monetary policy – as well as fiscal and other “structural” reforms – will be required to remedy this malaise. Australian fundamental data has stabilized recently, meaning the RBA isn’t being forced to take a too activist policy-stance. But the trend for growth indicators remains to the downside, with the RBA’s commentary about this dynamic to be closely watched this meeting.

2. Global “downside risks”

Out of the RBA’s recent meeting minutes, two key “risks” were defined. The first, domestic: the outlook for household consumption, amid elevated debt-levels and weak income growth. The second, global: the looming slowdown in the global economy, and the major negative consequences the US-China trade-war is having on a slowing global economy. Forward looking indicators for the global economy are becoming a matter of concern: global PMI data is portending a bottoming of the international business cycle. The RBA, just like other global central banks, is setting policy with the intention of fighting this force; markets will be sensitive to the RBA’s prognostications at this meeting, as-a-result.

What is the market expecting at this RBA meeting?

The RBA is expected to hold-pat at its meeting this week, having cut interest rates by a grand total of 50 basis points in its last two meetings. Market pricing right now suggests a slim 10 per cent chance that the RBA will cut for a third-month in succession. There is little impetus, it would seem, for the RBA to fire another of its rapidly depleting monetary policy bullets at the Australian economy. Hence, market participants will be fixing their attention today on the RBA’s commentary, to infer when the next rate cut may arrive, as the RBA’s previous two cuts work through the economy.

How could the RBA meeting impact the financial markets?

1. Interest rates

As is the theme for central banks across the globe, another interest rate cut from the RBA is considered a matter of if and not when. Monetary policy makers have one eye on domestic concerns, and another on what their global counterparts are doing, when making decisions on how they will affect interest rates going forward. The Fed’s cut last week lessened the need for the RBA to push forward with cuts, very marginally. But bets are still that the RBA, on balance, will cut rates again in October, with another cut after that implied for somewhere around the start of 2020.

2. Australian Dollar

The Australian Dollar has broken its tight relationship with interest differentials and monetary policy expectations in the last week. The price of the currency has been taken hold by traders using it as a proxy for trade-war and global growth concerns. As a consequence, the AUD/USD is trading at levels – outside of January’s freak flash-crash, that is – not seen since the Global Financial Crisis. Given that domestic Australian issues sits behind global concerns as its primary driver, the AUD may not exhibit a great deal of volatility around this week’s RBA meeting. A dovish RBA could weigh a little heavier on A-Dollar, however.

3. ASX200

The benchmark Australian stock market index has been fuelled to all-time highs lately, largely on the basis of looser monetary policy conditions – not just in Australia, but of course, around the globe. The milestone has been clocked up despite deteriorating economic fundamentals, and a concomitant fall-off in the earnings outlook for the ASX. Incidentally, Australian reporting season arrives this month, and is expected to show paltry earnings growth. Though reassurances from the RBA of policy support should aid the stock market, especially defensive sectors, just for this meeting, the dominant concerns about trade-wars and slower global growth may wash-out any RBA-induced positivity in the ASX200.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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