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%.