If anything the minutes of the Reserve Bank’s September board meeting have been more apposite by events in the two weeks since the discussions took place. China’s wobbling is a growing international downside risk, as we saw with another day yesterday of volatile trading and falls on Chinese stockmarkets.
That kicked whatever support was available for the local market – especially from the election of a more pro-business Prime Minister and as a result the local exchange lost 1.3%. Events in China seem to be more dominant than the intense focus on the forthcoming meeting of the US Federal Reserve and a possible rate rise.
The Aussie dollar rose, then sold off yesterday as the fears about China took hold.
Since the board meeting we’ve had the weak June quarter GDP figures, the poor retail sales for July, but better trade figures, housing finance data and building approvals for the same month, all hinting at better economic conditions. That was underlined by the better than expected August jobs figures.
In minutes from the September 1 board meeting, the Reserve Bank said international developments "add increased the downside risks to the outlook,” but it was too early to asses whether economic growth in the coming years would be affected.
Regarding China, the country’s largest trading partner, board members agreed that "recent volatility in Chinese equity markets was not expected to have a significant direct effect on the near-term economic outlook."
The RBA noted Chinese growth “had continued to ease” but said it was “too early to assess” whether recent policy action would alter the trend. But the data on trade (especially imports) last week and on Sunday (production and investment) help underline the concerns in the RBA minutes.
The bank pointed out that Chinese inflation remained below target (as we saw last week), providing scope for further policy easing should it be required (as seems to have started happening with more spending and talk of more to come).
The minutes contained an extensive discussion of the August change in policy on the value of the yuan and the small devaluation and why it had been done.
“The discussion of financial markets opened with members observing that the marked increase in financial market volatility over the past month had mainly been a response to concerns about the resilience of the global economy, stemming primarily from developments in China,” the minutes read.
"Much of the volatility had occurred in equity markets, with fixed income and foreign exchange markets generally exhibiting less volatility.
“Global equity prices experienced large swings over August and in net terms had declined sharply, mainly reflecting heightened concerns about China.
"Chinese equity prices had declined by more than 20 per cent over August – with very large daily and intra-day movements – and were more than 40 per cent below their peak in June, although still over 50 per cent above the levels reached in mid 2014,” the RBA observed in the minutes.
“Members noted that the recent volatility in Chinese equity markets was not expected to have a significant direct effect on the near-term economic outlook,” the bank said.
Domestically, the RBA took an optimistic view conditions – it said “number of indicators of domestic economic activity had shown some improvement over recent months” including surveys of business conditions and business profits The NAB business conditions survey last week supports that view).
The RBA said non-mining investment would decline in 2015-16, “but by less than implied by the survey taken three months earlier.” (which showed up in the capex data at the end of August).
And, the weaker Australian dollar, along with record-low interest rates, should aid in the transition and generate “a larger contribution from net service exports,” the RBA said.
On jobs, the RBA said employment "continued to grow strongly in July and the employment-to-population ratio had increased to its highest level since 2013."
The August jobs report surprised on the upside. But it again noted that “spare capacity remained and wage pressures continued to be weak.” That will help offset any inflationary boost from the falling value of the dollar.
On home prices, the bank said the housing market "remained strong" and that household inflation was being contained by "rapid growth in the construction of new apartments." However, it also cited “a notable decline in the growth in lending for investment housing in July.” That is what the RBA and the other regulator, APRA, wants to see.
And given that, is it no wonder that auction clearance rates in the Sydney market continue to weaken?
