I was wrong about the RBA easing in November. The RBA held their policy rate steady at 3.25%.
In doing so, they cited “prices data [that was] slightly higher than expected and recent information on the world economy slightly more positive”. The other positive development mentioned in the statement was the improvement in the broader financial conditions, as the global risk-factor compression trade has played out here as well.
A part of the error I could not have got right (I just didn’t see that inflation was higher than you’d expect given the policy changes), and the other parts I missed.
I had ignored the better global data and improvement in financial markets as I had been focused on two things. 1/ the extremely weak job adverts data and 2/ ongoing decline in commodity export prices. The reason I had preferred these is that I feel they give the best fix on the likely path of future inflation (as policy works with a lag central banks must target future inflation).
Anyhow, with regard November, it turns out that I should have just listened to the journalists.
Normally, at this point, I would head back to the drawing board to see where I had made my errors — however just as I drew myself into the house of mirrors to have a good hard look at myself, my email inbox tinkled with the midnight sound of four email alerts.
RBA mouth-pieces saying that nothing had changed, and that December was still a chance. Mitchell, McCrann, Bassanese, and Uren (all of whom tipped the October cut and the November pause) pointed out that the bank retained an easing bias, due to concerns about the labour market, and that the threshold for a cut in December was low. All we need is a bit of soft labour market data.
So where does that leave me on my poor judgement in November?
I would never take the easy way out and say the Bank got it wrong (for the game is picking their thinking), so I’m left concluding that they trust the leading indicators less than I do, but are concerned by the same developments. I guess job ads have been going down for a while now, and the unemployment rate has only recently picked up, so they’d prefer to see further evidence of damage before acting again.
Looking ahead more generally, it seems that the battle lines remain the same. We have a flagging mining boom, due to a declining terms of trade. Investment as a share of GDP probably has about 5ppts to decline as we go from boom to normal, and the challenge is to figure out how to boost alternative sources of demand as that occurs.
The RBA has time to get this transition right, as we haven’t even got to the investment peak — but I think leaving it late is riskier than they think. Once the job losses start occurring and folks lose their confidence, the ‘neutral’ rate starts to fall. And with this outlook, I cannot see that inflation will be an issue.
Anyhow, there’s always the chance that China or someone does something on the demand side, and boosts prices — which will re-invigorate the mining investment boom. Otherwise, it’s possible that the AUD will decline and boost the return on capital (and hence investment) in the weakly profitable and capacity-laden non-mining trade exposed sectors.
That’s not my central case, and not where i think things are going. It’s unlikely that the handoff from mining investment to consumption and residential investment will be as smooth as the RBA or Treasury hopes — and it’s likely that we’re going to need much lower rates to get these sources of demand to fill the mining investment ‘gap’.
As for December — we clearly need something to be worse than they expected … else they would have just cut in November. We will see the new forecasts on Friday when the SOMP is released — but based on what the media is telling us, the labour market data is the key.
An unemployment rate above 5.5% and soft wages inflation might do the trick for December, even if global growth remains stable and financial / credit market conditions remain favourable.