Expectations for a May rate cut had risen noticeably after Q1's inflation data came in much weaker than expected (see here). However, the RBA has been consistent this year in highlighting the importance of the labour market (as we covered here) and as per the Governor's statement, conditions therein remained robust enough to prevent the Board from moving this week. For that to remain the case, the unemployment rate will need to trend lower, with the Governor noting "...there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target".
On Friday, the RBA published its quarterly Statement on Monetary Policy for May. As expected, the Bank lowered its 2019 forecasts for GDP growth (from 3.0% to 2.75%) and underlying inflation (from 2.0% to 1.75%). For 2020, the trend growth (2.75%) forecast was retained, while there were downward revisions for both underlying (2.25% to 2.0%) and headline (2.25% to 2.0%) inflation. The unemployment rate is still forecast to decline to 4.75%, though the timing was pushed out to mid-2021 from end-2020. These forecasts are prepared on the assumption of the cash rate responding to market pricing, which currently implies that 50bps of cuts will be required for trend GDP growth and for underlying inflation to reach the lower bound of the Bank's target over the next couple of years.
From a data perspective this week, there were updates for international trade and retail sales. Australia posted another strong trade surplus for the month in March at $4.9bn. Net exports are likely to add modestly to GDP growth in Q1, while a healthy boost to national income will be delivered by surging commodity prices (read our review here). Retail turnover lifted by 0.3% in nominal terms in March, while growth over the year slowed to 3.2% from 3.5%. For Q1, retail turnover increased by 0.7%, though that was driven by a 0.8% rise in prices. As a result, retail sales volumes declined by 0.1% in Q1, slowing annual growth to 1.1% from 1.6% (see our full review here). As our chart of the week (below) shows, growth in household consumption, which is the largest component of the domestic economy, is likely to have eased further since the turn of the year, though retail sales only account for 30% of that component.
Chart of the week
—
The global perspective this week was almost exclusively focused on the sharp escalation in US-China trade tensions, driving heavy declines on equity markets as implied volatility surged to multi-month highs and government bond yields tightened noticeably. Early in the week, US President Trump announced via Twitter that he intended to increase the 10% tariff imposed on a $200bn tranche of imports from China to 25% on Friday, citing that progress on reaching a trade deal had moved "too slowly". According to this Reuters article (here), it was the view of US trade officials that China had backtracked from earlier commitments around several key elements of the draft trade deal.
The 10% tariff applied to this $200bn tranche of Chinese goods imported into the US took effect from 24 September last year and was due to rise to 25% from 1 January 2019. However, that increase had been on hold ever since conciliatory meetings between US and Chinese officials at last November's G20 Summit.
On Friday, the tariff increase was ultimately confirmed by President Trump, saying that China "broke the deal", with the possibility for more to follow given his earlier vow to impose a 25% tariff on a new $325bn tranche of Chinese goods "shortly". In response, China's Ministry of Commerce said that it "will have to take necessary countermeasures" though details have not yet been forthcoming. The People's Bank of China pledged further stimulus if required, after reducing reserve requirements for some small and medium-sized banks early in the week. Talks overnight on Friday were described by Chinese Vice Premier Liu as "honest" and "constructive". The sharp escalation in tensions this week came very much against the run of play expected by markets, which have run up over recent months in anticipation of a positive resolution scenario, helped also by a broad-based accommodative shift from global central banks.
Europe's economic outlook is heavily exposed to external trade, particularly with Asia, so this week's escalation in trade tensions unsurprisingly dented equity markets across the continent. The European data flow was limited this week; retail sales volumes were flat in March (expected -0.1%) as growth through the year slowed to 1.9% from 3.0%, meanwhile the final read of Markit's Purchasing Managers' Index for the services sector in April was lifted to 52.8 from 52.5, with Germany's read also revised up to 55.7 from 55.6.
Closer to home, the Reserve Bank of New Zealand (RBNZ) acted on its explicit easing bias by lowering its Official Cash Rate by 25bps to 1.50% at its policy meeting on Wednesday. The RBNZ's decision statement indicated the move was a proactive step, citing that while the labour market was operating near full capacity, the outlook for employment growth was "subdued". The Committee also referred to headwinds for output growth from weaker domestic household spending and slower growth in the economies of its major trading partners, including China and Australia.
Closer to home, the Reserve Bank of New Zealand (RBNZ) acted on its explicit easing bias by lowering its Official Cash Rate by 25bps to 1.50% at its policy meeting on Wednesday. The RBNZ's decision statement indicated the move was a proactive step, citing that while the labour market was operating near full capacity, the outlook for employment growth was "subdued". The Committee also referred to headwinds for output growth from weaker domestic household spending and slower growth in the economies of its major trading partners, including China and Australia.
