At a speech in February, RBA Governor Lowe signaled a shift to a neutral stance by highlighting that the probability for the next move in interest rates in either direction appeared to be "more evenly balanced" than it had been. This week's meeting indicated a slight dovish tilt from that assessment. The final line of the Governor's statement was altered for the first time since March 2017 from "...the Board judged that holding the stance of policy unchanged... would be consistent with sustainable growth in the economy and achieving the inflation target over time" to "The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time". This perhaps acknowledges Q4's soft GDP growth outcome of 2.3% year-on-year, which was well below trend growth and RBA forecasts and places increased importance on the data flow going forward, particularly on labour market indicators. The RBA provides its updated forecasts next month, which are expected to be downgraded from those published in February.
The Federal Budget on Tuesday showed a greatly improved starting position compared with expectations outlined in December's mid-year update, driven by elevated commodity prices and lower expenditure, with the forecast for the 2019/20 surplus rising from $4.1bn to $7.1bn. The Government's strengthened fiscal position has provided the flexibility for tax relief to low and middle-income earners taking effect in the current financial year and for investment in infrastructure projects in several states. Both aspects are positive developments for the domestic economy, though it remains to be seen if the scale of the tax relief will notably lessen the headwinds facing the household sector from weak income growth and declines in net worth. For comparison, the opposition's budget reply contained tax relief that is more narrowly targeted at low income earners and a different composition for public spending focusing on health and education measures.
Several data updates came to hand this week. Building approvals posted a volatile 19.1% rise in February, driven by the high-rise segment in Sydney and Melbourne, though the trend shows a decline of nearly 22% through the year (see our review here). The deterioration in residential construction activity is impacted by ongoing property price declines, with CoreLogic's Home Value Index showing a national decline of 0.6% in March, taking the annual fall to 6.9%. In positive news, retail sales posted a surprisingly strong outturn rising by 0.8% in February, its fastest monthly gain since November 2017 and well clear of the expected outcome of 0.3%, as annual growth lifted to 3.2% helping to alleviate concerns of a further slowing in household consumption (see our review here). Last but not least, Australia's trade surplus lifted to a record high at $4.8bn in February (see our analysis here) and features as the chart of the week (below). Surging iron ore prices are generating a tailwind for national income and bolstering the fiscal position of the Federal Budget.
Chart of the week
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From a global perspective, the main development this week were reports that the months-long US-China trade negotiations were nearing the end stage. Those expectations firmed on Thursday when US President Trump said that a deal with China could be potentially finalised within the next 4 weeks, though there was still progress to be made around the areas of tariffs and intellectual property rights. The trade tensions between the US and China weighed on global growth through the second half of 2018 and into the new year, so these developments were a strong tailwind for markets this week. Also supportive, Purchasing Managers' Index (PMI's) on both the official and private Caixin surveys for the manufacturing sector in China moved above the 50.0 level that signals expansion. PMI's covering China's services sector also firmed and point to increased activity levels going forward.
In the US, the latest non-farm payrolls report rebounded strongly in March, with employment rising by 196,000 after a soft upwardly revised increase of 33,000 in the previous month. This outturn was well in front of the 177,000 addition forecast by markets. The unemployment rate remained at 3.8% and the broader underutilisation measure (U-6) held at the 18-year low of 7.3%, though the participation rate eased to 63.0% from 63.2%. Growth in average hourly earnings moderated from their decade-high pace of 3.4% to 3.2% through the year.
In the US, the latest non-farm payrolls report rebounded strongly in March, with employment rising by 196,000 after a soft upwardly revised increase of 33,000 in the previous month. This outturn was well in front of the 177,000 addition forecast by markets. The unemployment rate remained at 3.8% and the broader underutilisation measure (U-6) held at the 18-year low of 7.3%, though the participation rate eased to 63.0% from 63.2%. Growth in average hourly earnings moderated from their decade-high pace of 3.4% to 3.2% through the year.
The European Central Bank (ECB) minutes highlighted that the growth momentum in the euro area weakened towards the end of 2018 and had continued in the current year, impacted by a deterioration in the manufacturing sector, with the slower trajectory impacting the outlook for inflation towards the Bank's target. This prompted the Governing Council to shift out its forward guidance for rates to remain on hold from "the (northern) summer of 2019" to "at least through the end of 2019", and to also announce the introduction of a new round of targeted longer-term refinancing operations (TLTRO-III) offering the banking sector access to funding on favourable terms to drive lending to the real economy and thereby ensure the transmission of its expansionary monetary policy settings. There was little in these minutes around the latest consideration for the ECB relating to the potential introduction of a tiered deposit rate to alleviate concerns over the profitability of the banking sector due to a long-running compression of interest margins, though more analysis around this is likely to be communicated by the Bank in the near term.
Brexit developments were a second-order consideration this week. The latest was that PM Theresa May and Opposition Leader Corbyn commenced negotiations to try and find a breakthrough in the impasse. This points towards an increased possibility of a soft-Brexit outcome, with the Opposition Leader in favour of moving to a customs union with Europe. Meanwhile, the lower house of the Commons voted in favour, by a majority of 1 vote, to a bill introduced by an opposition member to force PM May into seeking a delay to Brexit from the EU ahead of the upcoming April 12 cliff-edge date.
