In the intervening period since October's meeting, the main developments have been:
- From offshore: After a turbulent month in September, sentiment in global markets was more optimistic in October. Key to this was signs of progress in US-China trade negotiations leading to the tentative 'phase one' agreement, while in the UK the risk of a no-deal Brexit appears to have subsided with PM Johnson securing a new withdrawal agreement with EU and will now take this to an early general election on December 12. Overall, global activity surveys indicated that weakness persists in the manufacturing sector and while there are signs this is spilling over to the services sector, it remains resilient on the whole. As such, the IMF issued another downgrade to its global GDP growth forecasts in 2019 (from 3.3% to 3.0%) and in 2020 (from 3.6% to 3.4%). Data for Q3 showed that GDP growth slowed in the US (2.0% to 1.9% annualised), China (6.2% to 6.0%Y/Y) and the euro area (1.2% to 1.1%Y/Y). On the policy front, the US FOMC announced its 3rd consecutive 25 basis point rate cut taking the fed funds target range to 1.5-1.75%, while in Europe the ECB left its policy stance on hold and in Japan the BoJ was also unchanged but tweaked its forward guidance to indicate that lower rates may be on the cards.
- In Australia: The headline developments were in the labour market and inflation. In September, employment increased in line with expectations rising by a net 14.7k and 87.6k over Q3 (see here). Employment growth continues to defy expectations for a slowdown holding at 2.5% in annual terms, while the 3-month annualised pace lifted from 2.3% to 2.7%, implying the pace has reaccelerated recently. With the participation rate ticking down by 0.1ppt to 66.1%, the unemployment rate reversed its increase in the previous month falling from 5.3% to 5.2%. Furthermore, the underemployment rate fell from 8.5% to 8.3% and the underutilisation rate declined from 13.8% to 13.5%. In Q3, inflation matched market and RBA expectations on both a headline and underlying basis but remains soft overall (see here). Headline inflation came in at 0.5% in the quarter and the annual pace lifted slightly from 1.6% to 1.7%. The RBA's preferred trimmed mean measure printed at 0.4% in Q3 keeping the annual pace at 1.6% and well below the 2-3% target band. Also of note, consumer confidence according to the Westpac Melbourne Institute's index saw a precipitous decline of 5.5% in the month and highlighted concerns around the economic outlook, with consumers now at their most pessimistic since mid-2015. However, the turnaround in the housing market continues to gather momentum as finance approvals to the owner-occupier segment lifted by 0.7% in August to mark a 4th consecutive monthly rise (see here), while capital city house prices increased by 1.4% in October according to CoreLogic following gains of 1.1% in September and 1.0% in August.
All considered, with a slight more constructive tone from offshore and with the improvements seen in the most recent labour market data, the Board is highly likely to remain on hold at 0.75%. Inflation remains below target but the explanation used to justify the previous rate cuts as well Governor Lowe's comments around the inflation target in his speech last week reiterates the point that the reaction function is currently more about labour market developments. Markets are pricing in only a 7% chance of a rate cut today, while all 25 economists surveyed by Bloomberg Australia expect no change in the cash rate.