RBA on hold in April

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I’m shocked at the market pricing for this week’s April RBA meeting.  Despite his recent poor record in calling the RBA (certain hold in Dec, and certain cut in Feb) folks offshore  are buying AUD and talking about this article by News Corp’s Terry McCrann.

Mr McCrann may well be right, but I doubt it.

The reason i doubt it is that there has not yet been evidence of a material weakening in demand. And remember, this is the pre-condition for easing (from the March communique):

Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy

We haven’t had enough data to say that anything material has occurred. The RBA added some flesh to these bones in the March Minutes:

The clearest downside risk to the outlook for Australia remained a sudden worsening in the situation in Europe and its flow-on effects to the rest of the world through trade, financial and confidence channels. Members noted that a sharp slowdown, particularly in east Asia, would have significant implications for commodity prices and demand for Australian exports. A major flight from risk in global capital markets would see significant changes in credit conditions, the exchange rate and confidence. So long as inflation remained well contained, there would be ample scope for the Bank to ease policy in such a scenario.

That hasn’t happened — so why the rally?

I suspect that McCrann’s argument got traction because the YoY pace of Q4 GDP was ~0.5% below the RBA’s Feb SOMP forecast (2.25% v. RBA 2.75%).

However, the data is a little more complicated than that. Those with experience with Aussie data (and the RBA) know how little the quarterly GDP numbers are worth. By far, the RBA prefers the unemployment rate – because over time, GDP tends to get revised a lot, and it tends to get revised toward the unemployment rate.

The Q4 GDP report contains an example of this ‘revision problem’. While Q4 GDP was a bit weaker than the RBA expected, there were back revisions that made 2011 exactly as the bank had forecast (2011 year average GDP was 2%, as the RBA had expected). Given that the unemployment rate was steady in Q4, the odds are that Q4 GDP will be revised up.

Another reason to think that the RBA is on hold is that there has been no new unemployment data since the March meeting, and there will not be any until after the April meeting. The unemployment rate has been steady ~5.25% for almost three quarters.

If the unemployment rate moves up to 5.4% in the next jobs report (due 12 April), and Q1 CPI is 0.5%q/q or lower, the RBA could ease 25bps in May – but I would be shocked if it happened on Tuesday 3 April.

The other reason Mr McCrann’s story may have got traction is that the world is full of China scepticism just now.

This was encouraged by the weak HSBC China PMI (March -1.3pts to 48.3).

The strength in the official March PMI (+2.1pts to 53.1, released Sunday 1 April), ongoing improvement in financial conditions (higher equities, weaker AUD), and lack of local data makes me think the probability of a cut is somewhere around 10%.



  1. I remember recently reading that the o/n (futures & swap) market is broken because more people are putting on protection trades against Eu meltdown or something like that. Didn’t pay much attention to it at the time. Does this ring a bell?

    1. There is an element of that. We are the global risk off play, as we have very high yields and good credit, so AUD FI will outperform in an uber-bear case.

      Sent from my iPad

  2. 100% agree. Some inflation numbers:

    – Weighted median inflation Y/Y HAS NOT BEEN UNDER 2.5% since 2008! And the target band is supposed to be 2-3% (?!?!?)
    – Service inflation (domestic) is currently at 4.3% y/y! This is the highest level since 2008 and it’s accelerating.
    – Salaries are growing at about 4% y/y (are we the only one in the world with salaries growing at this ridiculous speed?).

    The RBA will want make sure that inflation pressures are really moderating before cutting again, so they’ll wait for the April unemployment numbers and inflation IMO.

    1. Yeah, i think we are one of the only nations with possible wage push inflation – which is why the RBA is one of the few banks not trying to talk down their currency.

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  3. What weight if any would the RBA place on the weak building approvals data this morning?

    1. If they cut it will not be because of approvals. Approvals were down due to NSW, where stamp duty changes may have pumped up Jan and hurt Feb. stable elsewhere.

      Did you see non-resi? Down 54% after +128% … Looks like a shopping mall and hospital in Jan …like a pig through a snake.

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      1. For me I have followed similar logic to you and can’t see any urgent need to cut….especially with inflation data little more than 3 weeks away

        However can’t believe how confident some are about a cut tomorrow….vested interest squawk has hit an all-time high

  4. wrong gentlemen,

    the is no wage push at all. Wages are quite normal.

    Glen Stevens has emphasised we do have a productivity problem.

    We are going from tight to very tight fiscal policy. Unless the mineral boom overcomes this and it hasn’t since 2008 then a fall in rates is inevitable.

    1. Hey, re wage push etc: whatever happened to ole Friedman’s maxim: “inflation is always and everywhere a monetary phenomenon”?

      1. Sorry that wasn’t meant to be a reply to oym, rather its meant for ricardo!

        1. Money makes jobs, which makes wage pressure, which makes inflation.

          Well, that is the narrative :)

          Sent from my iPad

    2. That is surely the question – can the boom undo the govt firing at the state and federal level.

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  5. Ricardo you are a mugwump.

    ( It is a bird that sits on the fence!!)

    1. Ha, i presume you mean on the fiscal v mining stuff (as i am not on the fence on the April RBA meeting). My guess is that mining will be big enough for the feds, but i am worried about state tightening. It was not in my numbers, and the Qld result may have changed the pitch. Seems to me that it is a loud warning to governments – if you want to stay elected, do not muck up the finances.

      So why not make a call on this?

      Bah i have enough forecasts to muck up without adding this one :)

      Sent from my iPad

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