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

The RBA has stuck to its rhetoric that the Australian economy is at a “gentle turning point”, and ought to return somewhere near trend growth in the medium term.

When is the RBA meeting?

This month’s RBA meeting will occur on Tuesday, December the 3rd at 2.30PM (AEST).

The economic data that matters:

GDP (YoY)

Unemployment Rate

Wages Growth (YoY)

CPI (YoY)

Retail Sales (YoY)

1.4%

5.3%

2.2%

1.7%

2.5%

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

How will the economy perform in 2020?

The RBA has stuck to its rhetoric that the Australian economy is at a “gentle turning point”, and ought to return somewhere near trend growth in the medium term. This is despite a recent deterioration in economic fundamentals, which has seen the unemployment rise to 5.3%, wages growth drop to 2.2%, and retail sales flatline at 2.5%. On top of this, Wednesday’s GDP data is forecast to show a well below trend growth rate of 1.6%. As it currently stands, the Australian economy is in a sluggish state; the market will be sensitive to any revisions the RBA makes to its outlook for the economy.

When will the RBA cut rates next?

The market is clearly showing little faith in the RBA’s ability to forecast, implying in the interest rate futures curve that the RBA will indeed need to cut rates again in the near future. Though the chances for a rate cut at this meeting currently sits at less than 10 per cent, the market has baked in a 60 per cent implied probability that the cash rate will be lowered in February. In addition to this, the balance of opinion in the market appears to suggest another cut will be at hand after this, too. Thirty-two basis points of rate cuts are baked into the market currently for 2020.

How soon will the RBA hit the effective lower bound?

This move to price-in two more rate cuts from the RBA next year arose consequent to commentary from RBA Governor Philip Lowe in November, when addressing the likelihood of a quantitative easing (QE) program from the RBA in the future, that a QE regime would only come about after the central bank hit its effective lower bound (ELB) at 0.25%. This defied what was the existing wisdom that the ELB sits at 0.5%. Given the markets conviction that the economy will underperform in 2020, traders are assuming that the RBA will be forced to cut to the ELB, eventually – the question has become a matter of how fast it’ll get there.

How could the RBA meeting impact the financial markets?

Australian Dollar

Although risk-appetite in global markets has increased in markets lately, the Australian Dollar’s trend has remained firmly to the downside. Granted, volatility in global FX markets has been significantly lacking recently, meaning the moves in the Australian Dollar have been relatively small. Nevertheless, expectations for imminent RBA rate cuts, and a subsequently widening disadvantage when it comes to interest differentials, has kept upside in the currency contained. A break in the A-Dollar’s multi-year downtrend still appears a long way away. And if the RBA happens to reaffirm a dovish bias at this week’s meeting, then that downtrend can only become further entrenched.

ASX200

The ASX200 has been driven to record highs courtesy of greater expectations for RBA rate cuts in the year ahead. Speculation that the RBA will need to cut twice more – and even embark on a QE program - has seen a major drop-in risk-free rates, which has in turn boosted stock market prices. Like most major equity indices, momentum is clearly skewed to the upside for the ASX200. However, valuations remain highly stretched, with prices primarily supported by hopes regarding a US-China trade-deal, and accommodative monetary policy. Further upside for the ASX200 in the short-term relies considerably on the RBA keeping its dovish bias.


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