Macro (Re)view (31/3) | Upbeat close to Q1

Markets closed the opening quarter of the year on an upbeat tone after the immediate concerns emanating from the stresses in the global banking system eased. US and European equities were sharply higher through Q1, with falling bond yields acting as a tailwind on the expectation that both the Fed and ECB are nearing the end of their respective tightening cycles. Domestically, the RBA meets next week where the Board will "reconsider" the case to pause rate hikes. 

RBA to pause next week 

Declining inflation and soft retail sales data point to the RBA pausing its rate hiking cycle at next week's meeting. Monthly CPI data over January and February should confirm to the RBA that inflation peaked in Q4. The 12-month CPI has slowed in consecutive prints since the December high of 8.4%, easing to 7.4% in January and then to 6.8% in February (see here). This has come on the back of travel costs unwinding after surging ahead of the peak holiday period; though the inflationary pulse in other key categories - notably in home building costs and food - has also weakened. While inflation is still elevated, the momentum is declining, which strongly hints that RBA policy is appropriately calibrated in a restrictive zone. 

Equally, a 0.2% rise in February retail sales painted a similar picture (see here). The momentum in retail sales has clearly weakened over the past few months - in particular in discretionary categories - following a strong rise in November driven by Black Friday. Pressures on household budgets and rising interest rates are weighing on spending; meanwhile, the demand for credit has also slowed with annual growth easing to 7.6% in February, down from the high around the back end of Q3 last year at 9.5%.     

Conditions in the labour market appear to have eased somewhat as job vacancies declined for the third straight quarter; however, the level remains highly elevated at almost 440k (equivalent to 3.1% of the labour force) and indicates that the demand for labour continues to be strong.   

US economy shows signs of cooling  

Coming off a strong start to 2023, US personal consumption slowed from 2% in January to 0.2% in February. Adjusting for inflation, volume growth in consumption declined in the month (-0.1%), with weakness evident in both services (-0.1%) and goods (-0.1%). Over the past year, consumption growth slowed to a 2.5% annual pace from 6.7% in February-22. This reflects the fading of the rebound from the pandemic and also a protracted period of weakness in real incomes caused by high inflation. In response, the saving rate - despite rising in recent months - sits well below pre-pandemic levels, printing in at 4.6% in February. 

The Fed is making headway in lowering inflation, though progress remains gradual. The headline PCE deflator eased from 5.3% to 5.0%yr in February - its slowest pace since September-21 - while the core rate was 4.6%yr, which was lower than expected but has been little changed over recent months. 

Core inflation still rising in Europe

Although headline inflation in the euro area fell sharply from 8.5% to 6.9%yr in March, a firming in the core rate to a new record high at 5.7%yr underscores the ECB's hawkish narrative. Falls energy prices from the highs reached at the outset of the Ukraine war drove the decline in headline inflation. While this has provided some relief to households, other costs have accelerated over the past year, notably food inflation has risen from 5% in March-22 to 15.4% 12 months later. Meanwhile, price pressures in the core of the basket have yet to abate. Services inflation firmed to 5%yr and its elevated pace partly reflects wage pressures being generated by strong labour market conditions. The euro area's unemployment rate was unchanged around historic lows at 6.6% in February.

BoE watching credit conditions   

The Bank of England published its latest financial stability review this week while officials from the central bank fronted the Treasury Committee following the collapse of SVB and its UK subsidiary. The overall message conveyed the resilience of the broader UK banking system to the recent stresses, with different rules applying to UK banks for managing interest rate risk. However, the authorities anticipate that spillover effects could lead to headwinds for the UK economy through tighter credit conditions for domestic households and businesses. BoE Governor Andrew Bailey said that if the flow of credit needed to be supported, it could lower the counter-cyclical capital buffer, which would reduce the additional capital it requires banks to set aside as cover for potential losses. Governor Bailey also sought to clarify that the stresses in the global banking system were not a constraint on monetary policy, reaffirming a point he made in a speech earlier in the week. 

Australian CPI declines to 6.8% in February

The opening for the RBA to pause rate hikes next week became a little wider after this morning's CPI report for February. The 12-month CPI declined from 7.4% in January to 6.8%, lower than the 7.2% expected, and is well down from the high in December (8.4%). This all but confirms Q4 as the peak, with headline inflation likely to fall to around 7% in the main CPI release for Q1 (due 24/4). The core rate also softened in February, with CPI ex-volatiles sliding from 7.5% to 6.9%yr.      

While Australian inflation remains well above the RBA's 2-3% target band, the inflationary pulse coming from key categories is losing momentum. Notably, the surge in travel costs driven by strong demand over the peak summer holiday period was largely unwound in February. 

Food and home building costs have risen sharply over the Covid period but are continuing to plateau. Falling prices in traded goods on the back of lower demand and improved supply chains look to finally be starting to flow through to Australian households. 

However, households are being hit by surging electricity prices (17.2%yr); fuel prices meanwhile are well down from the highs in early 2022 in the early stages of the war in Ukraine but remain elevated.   

The full details won't be known until the quarterly inflation report is published in late April, but there looks to be sufficient evidence for the RBA ahead of next week's meeting for it to confirm its priors that Q4 was the peak for the CPI. Whatever way one looks at it, the momentum is now with lower not higher inflation. To be clear, inflation is still a problem but the full effects of the RBA's tightening cycle on demand conditions are yet to play out. 

The RBA Board downgraded its assessment of the risks of a wage-price spiral in Australia at the March meeting and put the option to pause rate hikes back on the table. With many of its central bank peers close to sitting on the sidelines amid an expected tightening in lending conditions following the strains that have emerged in the US and European banking systems, the RBA may conclude now is the time to pause. 

Australian retail sales rise 0.2% in February

After opening 2023 with a strong rebound, Australian retail sales were broadly flat in February (0.2%). Retail sales are little changed on net since September, with the momentum clearly weakening over recent months due to pressures on household budgets and the fading of the post-Covid recovery. Discretionary spending matched the headline result (0.2%) but has been around mid-2022 levels for the past 3 months.

Momentum in retail sales has been weak over recent months, the turning point appearing to come following a strong Black Friday sales period in November ahead of Christmas. The 3-month average pace for retail sales slid to -0.6% in February from 0.9% in November, with weakening momentum in discretionary sales (-1.2% from 1.0%) the driving factor.  

Looking at the breakdown of the categories, spending on clothing and footwear and at department stores has rebounded to be at levels last seen in October, before the Black Friday surge. However, spending has failed to rebound in household goods, which remains well down around late-2021 levels, and 'other' retailing (including personal effects and recreational goods etc). Notably, spending at cafes and restaurants has remained resilient over recent months, though that partly reflects restaurants passing through cost increases to customers.  

The momentum in retail sales has weakened over recent months, consistent with the slowdown in household consumption into year-end reported in the December quarter national accounts. With the full effects of the RBA's tightening cycle yet to impact households, a pause in rate hikes is nearing. Whether that pause is forthcoming in April could hinge on tomorrow's CPI report.  

Macro (Re)view (24/3) | Switching focus of central banks

Developments in the US and European banking systems remain squarely in focus, both by markets and now central banks. Meetings at the Fed and Bank of England (among others in Europe) saw rates continuing to be hiked but with indications that tightening cycles are near their the end in anticipation of weaker growth and a disinflationary impulse from tighter lending conditions. 

Fed switches its focus 

A 25bps hike by the Fed's FOMC brought the target range to 4.75 - 5%, a level that is likely to be around, if not already at, the peak for the cycle in the US. That indication was reflected in changed guidance: the expectation for "ongoing increases" in rates was replaced with a softer outlook that "some additional policy firming may be appropriate". In the post-meeting press conference Chair Jerome Powell made clear the stresses in the US banking system have altered the FOMC's thinking. In particular, he noted that the FOMC's reaction function would broaden to take into account the "actual and expected effects of tighter credit conditions" on the economy and on the labour market and inflation. Powell said those effects would essentially substitute for additional rate hikes.  

The questions the FOMC is now contending with are how significant the credit tightening will be and how sustained its effects on the economy. Given this degree of uncertainty, it is understandable the summary of economic projections was little changed from December, with below trend growth expected this year and next and inflation gradually coming back to the 2% target in 2025. In the scenario, Chair Powell said the FOMC did not foresee the rate cuts markets have discounted for later in the year as a result of the banking stresses.  

BoE keeps tightening  

Topside surprises on the UK's February inflation outturns kept the Bank of England in tightening mode this week. However, the MPC downshifted the pace of this latest hike to a 25bps increase in a 7-2 analysis (2 voting for no hike) and retained its guidance for further tightening being contingent upon the signs of "more persistent pressures" in inflation. Bank rate now stands at 4.25%, up 400bps over the course of the tightening cycle and the sense is that a pause is imminent. 

That may appear questionable given CPI on both a headline and core basis printed 0.5ppt above expectations in February at 10.4%yr and 6.2%yr respectively; however, the BoE continues to anticipate inflation pressures will ease sharply from Q2 as the effect of the government's energy price cap flows through to household power bills. Services inflation reaccelerated to 6.6%yr, though, here, the MPC noted wage pressures are now expected to slow more quickly following softer signals recently in its Decision Maker Panel surveys.

Over in Europe, the ECB's watchers forum saw a host of officials from the central bank speaking publically following last week's decision to hike rates by 50bps. President Lagarde in her opening address maintained the line that there is no trade-off between price stability and financial stability, essentially arguing that rates can continue to be hiked amid the current banking stress. But Presudent Lagarde then went on to say that it would be altert to ensuring that there is not a disorderly tightening of financing conditions. 

Pause on the RBA's radar

While the RBA Board elected to keep hiking rates earlier this month, there were signs in the meeting minutes and in a speech from Assistant Governor Kent that a pause may get over the line in April. Although the minutes note the Board expected further tightening would likely be needed, it had also agreed to reconsider the case for pausing at the next meeting.

Given it already assesses the cash rate to be at a restrictive level and amid an uncertain economic outlook, the Board is becoming more cautious about the risk of overtightening. This gives recognition to the lagged effects of tightening sitting in the pipeline from 350bps of rate hikes since May last year. 

Assistant Governor Kent highlighted the rise in the share of fixed-rate mortgages and the run-up in savings accumulated over the Covid period as delaying the full impact of rate hikes on the Australian economy. A few of key inputs that could shape the Board's thinking will come to hand next week with the monthly CPI, retail sales and job vacancy data for February all on the calendar.   

Macro (Re)view (17/3) | Between a rock and a hard place

Stresses in the US and European banking systems leave central banks in a difficult place with inflation still elevated. The collective actions of authorities on both sides of the Atlantic to shore up confidence may be sufficient for now: that's if the ECB's decision to push ahead with rate hikes offers any guide to what the Fed and BoE may do at their respective meetings next week. But markets are clearly of the view that central banks are not far away from ending rate hikes on the anticipation that tighter lending conditions will weigh on growth and inflation. 

US inflation to retain the Fed's attention  

While stresses in regional US banks have cast a shadow over next week's Fed meeting, a 25bps rate hike appears the most likely outcome. That comes after the ECB pressed ahead with hiking rates (see below) and as core inflation surprised to the upside of expectations in the February CPI report. What shapes as the wildcard for next week is what the Fed does with its projection for the peak rate, currently at 5.1%. Only recently, the expectation was that this would be raised to 5.5% but that is now under the spotlight. 

In February, headline CPI eased to 0.4%m/m (from 0.5%) but the core rate went the other way to 0.5%m/m (from 0.4%) and remained well above a pace consistent with the Fed's inflation target. Annual inflation continued to unwind from the peaks of last year - headline sliding from 6.4% to 6% and the core rate easing from 5.6% to 5.5% - but progress remains gradual. 

Once again, the disinflationary pulse from durable goods was evident (0%m/m, -1.8%yr) but services inflation remained elevated (0.5%m/m, 7.6%yr) and this is holding back the pace of decline in both headline and core inflation.

In news relating to the US consumer, retail sales softened from a very robust start to 2023, with weak outturns coming through for both headline (-0.4%) and core sales (0%). However, a solid rise for control group sales (0.5%) on the back of January's surge (2.3%) suggested household demand retains underlying strength.  

ECB presses on  

The ECB stuck to its guns and hiked rates by 50bps this week as revised forecasts projected inflation remaining "too high for too long". With the depo rate lifting to 3.0% - still well below the policy rates of many of its global peers - and core inflation remaining on the rise to 5.6%yr in February, the ECB was not dissuaded from hiking by the instability in markets. But this has added a layer of complexity to an already uncertain economic outlook and prompted the Governing Council to shelve forward guidance. 

In the post-meeting press conference, President Christine Lagarde said that the ECB was closely monitoring the situation in the banking system and that it could call upon its toolkit of liquidity measures if the circumstances required it to act. When pressed on whether hiking rates to restore price stability would take a back seat to financial stability considerations, President Lagarde said that there was "no trade-off" with each needing to be addressed with a different set of tools. 

The ECB's latest macroeconomic projections were revised to show an expectation for higher growth and lower headline inflation in 2023 than previously forecast; however, these projections are heavily caveated having being finalised prior to the emergence of strains in the banking system. GDP growth was revised up to 1% (from 0.5%) before lifting to 1.6% in 2024 and 2025 (from 1.9% and 1.8% respectively). Headline inflation was forecast to decline more quickly this year, easing to 5.3% by year-end (from 6.3%) but core inflation was revised higher (4.6% from 4.2%). Both headline (2.1%) and core inflation (2.2%) are not expected to be back around the ECB's target until 2025.

Australian labour market returns to strength 

The Australian labour market regained momentum in February after conditions loosened around the turn of the year. The unemployment rate fell back to half-century lows at 3.5% from 3.7% as employment increased by 64.6k - its largest rise since June-22 - more than rebounding from a 27.5k decline over December and January. With many people returning to work or starting new jobs after the peak summer holiday period, hours worked surged by 3.9% in the month (full review here). 

Rising employment and hours worked saw labour market tighten, reversing a recent easing in conditions as both underemployment (6.1% to 5.8%) and total underutilisation (9.8% to 9.4%) declined, the latter falling back to be around its lowest since the early 1980s. A rise in the participation rate to 66.6% - with likely more to come as overseas arrivals enter the labour force - should help keep wages growth rising at a gradual pace and leaves a pause in the RBA's rate hiking cycle on the table at the April meeting.

The expectation for further rate increases, however, kept consumer sentiment at a very weak level (78.5) on the Westpac-Melbourne Institute Index in March. The outlook for both family finances and economic conditions over the year ahead weakened and are around 19% lower than in March 2022; the effect of this deterioration in sentiment was evident in the slowdown in household consumption in the recent Q4 national accounts. Although business conditions in the NAB Survey remained robust in February (+17), a weakening in confidence (-4) highlighted uncertainty over their sustainability going forward.

Bank of England meeting looks finely balanced

Although market volatility and recent comments from Governor Bailey have lowered the bar for pausing rate hikes in the UK, a final 25bps hike could still be in play at next week's BoE meeting. This week's labour market data was strong, with a 65k rise in employment over November-January compared to August-October keeping the unemployment rate around historic lows at 3.7%. Still plagued by an elevated inactivity rate (36.8%) coming out of the pandemic, wages growth remained strong running at an annual pace of 6.5%. 

The government's latest budget was framed around an improved economic backdrop, with the growth forecasts revised upwards and the inflation outlook lowered. That provided the government with a windfall of around £25bn per year for the next few years. New measures announced by Chancellor Hunt use around 2/3 of that windfall, with the headline initiatives being expanded access to free childcare and tax incentives to boost business investment. The OBR assessed that this leaves the government with minimal "headroom" (0.2% of GDP) to achieve its main fiscal target for net debt to be falling by the end of the projections in 2027/28.   

Australian employment 64.6k in February; unemployment rate 3.5%

Activity in the Australian labour market has regained momentum after slowing around the turn of the year. Employment rebounded by almost 65k in February to post its strongest rise in 8 months. The unemployment rate fell back to 3.5% to be close to its cycle low and broader measures of spare capacity reversed recent increases.

    

Labour Force Survey — February | By the numbers

• Employment increased on net by 64.6k in February, rising more than the 50k expected and rebounding from consecutive falls in January (-10.9k) and December (-16.6k).  

• National unemployment rate fell back to 3.5% from 3.7% to sit just above the cycle low of 3.4% from October-22. The underemployment rate fell from 6.1% to 5.8% and the underutilisation rate declined 0.4ppt to 9.4%, a near 41-year low. 
• The participation rate lifted 0.1ppt to 66.6%, while the employment to population ratio rebounded from 64.1% to 64.3% to be close to record highs.  

• Hours worked surged by 3.9% in the month after the peak summer holiday season drew to a close. 

Labour Force Survey — February | The details

Australia's labour market moved back into gear in February as activity rebounded from a seasonal-related slowdown over December and January. Around 4.9 million Australians returned from summer holidays in February, with many of the almost 277k people who were waiting to start new jobs in January commencing work. 

The return to or start of work in 2023 for many saw hours worked surging by 3.9% in February, rebounding from three consecutive declines. Many fewer Covid-related absences were also a factor that supported rising hours compared to when the virus hampered activity in November (-0.4%) and December (-0.9%). 

Employment exceeded expectations lifting by 64.6k, led by full time employment (74.9k) as part time employment declined (-10.3k). This more than reversed a combined fall in employment of 27.5k over December and January. 

Over the past 3 months, employment lifted by 37.1k (3-month average of 12.4k), with full time rising by 50.6k and part time falling by 13.6k. That leaves the 3-month annualised pace of employment running just above 1%; the pace was averaging around 2.7% in the 3 months to November-22, so further solid gains in employment may be expected if conditions in the labour market are returning to that sort of momentum post its seasonal slowdown. 

After falling over December and January, an uptick in the participation rate to 66.6% added 48k people to the labour force. As that was exceeded by the rebound in employment, this saw the unemployment rate falling back from 3.7% to 3.5%, close to its half-century low of 3.4% in October-22. 

Furthermore, the rebound in hours worked helped reverse recent rises in measures of spare capacity; the underemployment rate declined to 5.8% to match its level in November-22 and the total underutilisation rate retraced to its Octener-22 level at 9.4%, the latter sitting close to a 41-year low. 

Labour Force Survey — February | Insights

A strong report today that effectively confirms the weakness in conditions in December and January was driven by seasonal factors. Forward-looking indicators of labour demand have come off their highs but remain elevated and point to a resumption of the momentum in hiring prior to the recent slowdown. This is important given the strong inflow of overseas arrivals, but that should also boost participation and keep the rise in wages growth to a gradual pace, consistent with the RBA's recent downgrading of the risk of a wage-price spiral.

Preview: Labour Force Survey — February

Australia's Labour Force Survey is due to be released by the ABS at 11:30am (AEDT) this morning. The past couple of reports have come in weak relative to expectations, leading RBA Governor Lowe to recently observe that labour market conditions had "eased a little" and open the door to pausing the tightening cycle. Markets are currently priced for that pause to come at the April meeting.   

As it stands | Labour Force Survey

Employment is coming off consecutive declines in December (-20k) and January (-11.5k) as labour market conditions appeared to soften around the turn of the year. Over the past two months, both full time (-28.9k) and part time employment (-2.5k) have declined. However, seasonal factors likely overstate this recent weakness. 

The unemployment rate is now at 3.7%, up slightly from the cycle low of 3.4% in October. This has also come alongside rises in underemployment (6.1%) and the total underutilisation rate (9.8%). Despite the rising inflow of overseas arrivals, the participation rate moved lower over December-January — something not uncommon over the peak holiday period — printing at 66.5% in January. 

A resurgence in Covid-related absences weighed on hours worked in November (-0.4%) and December (-1.1%). Then in January, hours worked fell sharply (-2.1%) due to a larger-than-usual rise in the number of workers taking annual leave. 

Market expectations | Labour Force Survey

Employment is expected to rebound in February, with the consensus forecast for today's report at 50k. On that basis, the market anticipates the unemployment rate to fall back to 3.6%. The ranges of estimates for employment (4k to 100k) and the unemployment rate (3.5% to 3.8%) are wider than usual, indicating a low level of conviction on where these outturns may print.  

What to watch | Labour Force Survey

The key question for today's report to answer is whether seasonal factors overstate the weakness in labour market conditions recently. Changing seasonal patterns in hiring suggest this could be the case. Since the onset of the pandemic, many more people have moved into employment in February than has historically occured, after reporting they were waiting to start a new job in January. 

This effect boosted employment in the Februarys of 2021 (75k) and 2022 (93.1k) and looks likely to repeat in 2023. In January 2023, there were 276.9k people who were waiting to commence a new job, similar numbers to in 2021 (249.4k) and 2022 (287.7k), indicating a rebound in employment is likely to be reported today. 

That assessment is further backed up by the ABS's high frequency payrolls data. After declining into year-end, payrolls rebounded over the month to mid-February in 2021 (2.8%) and 2022 (3.3%). The rebound in 2023 was of a similar magnitude at 2.6%, consistent with the pattern of more people moving into employment in February. 

Macro (Re)view (10/3) | Mixed signals on the radar

Fixed income was at the centre of a highly volatile week across asset classes amid uncertainty over the direction of central bank policy and risk aversion stemming from the collapse of SVB  in the US. The divergence in monetary policy settings has started to widen as the Bank of Canada went on pause - something the RBA indicated was now on its radar - while the Fed opened the door to reaccelerating rate hikes and with the ECB to hike by 50bps next week. Meanwhile, the Bank of Japan left all settings unchanged at Governor Kuroda's final meeting in charge.  

Fed weighing up the data   

Early on in the week, markets had taken their cues from Fed Chair Powell's testimony to Congress where he signalled a higher peak rate was likely and a willingness to reaccelerate the pace of rate hikes if supported by "the totality of the data". This pushed up the yield on the 2-year tenor above 5% but it subsequently fell sharply to close the week around 4.6%. Uncertainty over the wider impacts of the SVB situation and a mixed payrolls report drove the move lower. Next week's CPI report, however, could prove to be the deciding factor on 25 or 50bps as the Fed's next hike. 

A 311k rise in nonfarm payrolls in February was well clear of expectations (225k) and confirmed the underlying strength from the January report, which was revised only modestly lower to 504k (from 517k). An uptick in the participation rate to 62.5%, with the prime-age rate (83.1%) lifting back to its pre-pandemic high, was the other notable point of strength. The softer elements were a lift in the unemployment rate from 3.4% to 3.6% and average hourly earnings undershooting on the month-on-month (0.2% vs 0.3%) and annual pace (4.6% vs 4.7%). These components in addition to a decline in job openings in January (11.2m to 10.8m) are seemingly giving the market the impression that cycle tights in conditions have been seen.   

RBA tightening cycle draws closer to a pause  

A pause in the tightening cycle in Australia is back on the table - rates pricing indicating the April meeting is a line ball call - after the RBA watered down its hawkish narrative this week. Once again, the Board hiked rates by 25bps to 3.6%, but it softened its policy guidance by removing the reference to "further increases in interest rates" and signalled a more data dependent outlook (reviewed here). The expectation now is that a "further tightening of monetary policy" will be required to return inflation to the 2-3% target, with the data to determine "when and how much further interest rates need to increase". 

The most notable development since the February meeting appears to have been the RBA's assessment of the labour market. While still describing the labour market as "very tight", conditions are noted to have "eased a little", but the crucial observation was that following recent data on labour costs, the view was that there was "a lower risk of a cycle in which prices and wages chase one another". The slowdown in Q4 GDP growth was also highlighted, reflecting pressures on household budgets from the cost of living and rate hikes.  

In a speech the following day, Governor Lowe confirmed the shift in tone, noting that with rates now at a restrictive level, the Board was "closer to the point where it will be appropriate to pause interest rate increases". The Governor cited encouraging signs on inflation, both globally and in domestic goods prices, as indicating Q4 was the peak in Australia. The RBA remains cautious about the inflation trajectory from here, but the Governor said the intention remained to keep the economy "on an even keel" and to preserve the labour market. 

On the data front, trade data for January was out this week, the trade surplus remaining elevated at $11.7bn but narrowing as import spending reaccelerated (reviewed here).  

All in readiness at the ECB

Attention in Europe turns to next week's ECB meeting where the Governing Council is expected to deliver on its guidance for a 50bps rate hike. Beyond the March meeting, the ECB is leaving its options open, but the updated set of economic projections will give the Governing Council the chance to outline how it will calibrate policy going forward. Substantial falls in energy prices point to downward revisions to the inflation outlook and an earlier return to the 2% target than 2025; however, the resilience of growth in the euro area carries upside risks to inflation. 

Resilience has also been a key theme in the UK economy, which appears to have extended into 2023 as the monthly GDP indicator for January came in on the topside of expectations at 0.3%. Dire forecasts last year for a deep UK recession look now to be a materially lower risk due to the combination of fiscal support lowering energy prices and ongoing strength in the labour market. 

RBA hikes rates 25bps in March

The RBA's tightening cycle continued at today's meeting, with a 25bps rate hike taking the main policy rate to 3.6% and the exchange settlement rate to 3.5%. After turning more hawkish in February, today's statement from Governor Philip Lowe softened that narrative to be more in line with the Board's messaging at end of 2022, indicating a pause could be nearing. Pricing for the peak cash rate has fallen back to 4% from around 4.2% pre-meeting. 

Today's statement signalled a shift back to data dependency from the RBA to guide "when and how much further interest rates need to increase". That is a notable change from February when the reference to rates not being "on a pre-set course" was removed from the meeting statement as the Board communicated "further increases in interest rates will be needed over the months ahead". 

In my preview of today's meeting, I suggested that with the incoming data on wages and hourly labour costs coming in below the RBA's forecasts, there was scope for the Governor to soften the tone around the risks of a wage-price spiral emerging. Indeed, this is what played out as the Governor noted: "wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another". In my view, this was the key change from the February statement and frames the tightening cycle in a less hawkish context. While the RBA remains on guard that wage pressures could yet accelerate given the labour market "remains very tight", the Governor also observed that conditions recently had "eased a little".

On inflation, as outlined in the preview, the Board appears to have taken the decline in the 12-month CPI to 7.4% in January as a sign consistent with its forecast for inflation having peaked in Q4. Whereas in February, the Governor said that "strong domestic demand is adding to inflationary pressures" the assessment was more nuanced this time around. Goods inflation is expected to moderate reflecting global trends and softer demand, but services inflation is high on the back of the post-pandemic rebound in services spending and rising rents. 

Referring to last week's national accounts, the Governor noted the growth slowdown into year-end as consistent with household consumption easing in response to rising rates. Below-trend growth is expected in 2023 and 2024, with a softer outlook for housing construction also a contributing factor. 

All in all, the RBA's hawkish tone from February has softened as the risks of a wage-price spiral have eased and economic growth slowed with rising rates impacting household spending. But the guidance that the Board expects "further tightening of monetary policy" to be required is consistent with another rate hike in April. The shift to a more data-dependent focus potentially opens the door to a pause in May, contingent on the Q1 CPI report confirming Q4-22 as the peak in inflation.    

Australian trade surplus narrows to $11.7bn in January

Australia's trade surplus narrowed at the start of 2023 but remained at highly elevated levels. In January, import spending (4.6%) outpaced export earnings (1.4%) as pressures hampering global supply chains showed further signs of easing.  

International Trade — January | By the numbers

• Australia's trade surplus narrowed to $11.7bn in January from an upwardly revised $13bn in December ($12.2bn initially reported).  

• Exports ended a run of three consecutive declines posting a 1.4% rise in the month to $58.8bn (16.8%yr).  
• Imports reaccelerated to see their fastest rise in 6 months lifting by 4.6% to $47.2bn (24%yr).

International Trade — January | The details

The opening month of 2023 saw momentum in imports pick up after weakening into year-end, while exports continue to lift. The trade surplus averaged $13bn over the final 3 months of 2022, so the January result of $11.7bn was a clear step lower. 

Import spending contracted by 3.7% in the December quarter but rebounded strongly by 4.6% to open the year. Consumption (11.7%) and capital goods (10%) lifted sharply on an influx of vehicle imports (passenger vehicles surging 30.9% and industrial vehicles up 57%), with capital goods also boosted by telecommunications equipment (57.3%). These increases likely reflect the easing of constraints that have hampered global supply chains. Intermediate goods (-3.2%) fell for the 5th month running as the value of fuel imports (-7.4%) continued to slide on lower prices. 

 

Services spending on imports lifted by 2.9% in January to be around 40% higher than a year earlier. Overseas tourism has seen a strong recovery but is still well short of pre-pandemic levels of spending. 

Export values increased by 1.4% in January to sit just off record highs. Goods exports advanced in the month (1.1%) on the back of non-rural goods (1.5%) as iron ore (12.8%) saw its strongest rise in more than a year on higher prices. The other commodity categories were weaker across the board. Rural goods (-2.9%) declined with cereal exports (-9.9%) pulling back from very elevated levels.   

The post-Covid recovery in services exports continued with a 3.1% rise in January to be up by 55.1% over the year. Rising overseas arrivals for holidays in Australia has seen tourism-related spending lift; however, it is still down by around 25% on end-2019 levels.  

International Trade — January | Insights

Net exports were the main driver of economic growth in a soft December quarter for domestic demand (see here). While commodity prices have retraced from their highs, they remain sufficiently elevated to be bolstering national income. The post-pandemic recovery in the services sector has been strong but still has some way to go.