Throughout 2019, the RBA has been taking incrementally dovish steps in its communication and April's minutes were the latest example. The final line used by the Governor in his decision statement two weeks ago was repeated in these minutes but was expanded to give added importance to labour market conditions by noting that "the Board will continue to monitor developments, including how the current tensions between the domestic GDP and labour market data evolve, and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time".
Given the uncertainty around how the 'tension' between slowing GDP growth and robust labour market conditions will resolve and with the inflationary pulse anticipated to remain soft, the minutes showed that the Board was prompted into considering a scenario in which the unemployment rate began to trend upward and inflation did not lift any higher. The assessment of the Board was that "a decrease in the cash rate would likely be appropriate in these circumstances". Though the Board acknowledged that such a move would likely have a reduced impact in the current environment, due to high household debt and the correction occurring in the property market, it countered that by highlighting the stimulatory impact from exchange rate adjustment and increased household cash flow.
March's labour force report showed that employment increased by a net 25,700 in the month, while the national unemployment rate lifted back to 5.0% due to a strong rise in workforce participation (for our full analysis see here). A key development was that the pace of employment growth firmed from 2.3% to 2.4% in annual terms after a solid Q1, which is shown as our chart of the week (below), adding to the existing tension with slowing GDP growth and thereby ruling out a near-term RBA rate cut.
Chart of the week
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The main highlight from abroad this week was the latest set of China data. Activity in the world's second-largest economy expanded by 1.4% in Q1, as annual growth remained at 6.4% to defy the market forecast for an easing to 6.3% and offer an early indication that recent stimulus measures, including tax cuts and infrastructure investment, are gaining traction. Officials in Beijing are targeting economic growth of 6.0-6.5% in 2019 compared to 6.5% last year, reflecting the impact of trade tensions with the US and the implementation of measures designed to achieve higher quality and more sustainable growth, notably by addressing risks to financial stability from the 'shadow banking' system.
In line with recent improvements in manufacturing PMI surveys, industrial production expanded sharply from an annual pace of 5.9% to 8.5% in Q1 to easily exceed the expected outcome of 5.9%. Furthermore, retail sales posted a stronger-than-expected increase of 8.7% over the year compared with the forecast for 8.4%, likely driven by recent strength in the residential property market. Lastly, fixed asset investment increased as expected with a rise of 6.3%ytd in Q1.
Turning to the US, momentum in the domestic economy appears to be easing early in Q2, with the IHS Markit 'flash' Composite PMI reading for April slowing to a 31-month low of 52.8 from 54.6 in March. The detail of the survey showed that growth in activity in the services sector slowed noticeably in the month, while conditions in manufacturing held steady. From a consumer standpoint, retail sales growth accelerated in March posting a 1.6% rise that was well clear of the 0.9% anticipated by markets, while growth in the 'control group' that feeds into GDP calculations lifted by 1.0% in the month. Also of note this week, comments by FOMC member Charles Evans gained attention where he highlighted that there would be a case for the Federal Reserve to cut interest rates if core inflation were to fall to 1.5% from its current 2.0% pace, though that was not the forecast scenario.
In Europe, the IHS Markit 'flash' composite PMI for April eased to a 3-month low of 51.3 from 51.6 in the previous month, indicating that subdued activity in the euro area economy continued into Q2, in response to weaker external demand while country-specific factors within the bloc weigh on output. The weakness continues to be concentrated in the manufacturing sector, most notably in Germany where the nation's key auto sector is contending with the headwinds from slowing global growth and regulatory changes. Conditions in the services sector remain positive, though output growth showed its slowest rate of expansion in 3 months in April.
In line with recent improvements in manufacturing PMI surveys, industrial production expanded sharply from an annual pace of 5.9% to 8.5% in Q1 to easily exceed the expected outcome of 5.9%. Furthermore, retail sales posted a stronger-than-expected increase of 8.7% over the year compared with the forecast for 8.4%, likely driven by recent strength in the residential property market. Lastly, fixed asset investment increased as expected with a rise of 6.3%ytd in Q1.
Turning to the US, momentum in the domestic economy appears to be easing early in Q2, with the IHS Markit 'flash' Composite PMI reading for April slowing to a 31-month low of 52.8 from 54.6 in March. The detail of the survey showed that growth in activity in the services sector slowed noticeably in the month, while conditions in manufacturing held steady. From a consumer standpoint, retail sales growth accelerated in March posting a 1.6% rise that was well clear of the 0.9% anticipated by markets, while growth in the 'control group' that feeds into GDP calculations lifted by 1.0% in the month. Also of note this week, comments by FOMC member Charles Evans gained attention where he highlighted that there would be a case for the Federal Reserve to cut interest rates if core inflation were to fall to 1.5% from its current 2.0% pace, though that was not the forecast scenario.
In Europe, the IHS Markit 'flash' composite PMI for April eased to a 3-month low of 51.3 from 51.6 in the previous month, indicating that subdued activity in the euro area economy continued into Q2, in response to weaker external demand while country-specific factors within the bloc weigh on output. The weakness continues to be concentrated in the manufacturing sector, most notably in Germany where the nation's key auto sector is contending with the headwinds from slowing global growth and regulatory changes. Conditions in the services sector remain positive, though output growth showed its slowest rate of expansion in 3 months in April.
