Two big events this week will set the parameters for the Australian economy for the rest of the year.
The RBA will cut rates tomorrow and on Wednesday the first quarter GDP figures will show that it was a booming market for commodities, especially iron ore and LNG that kept the economy on track.
Growth estimates from the market are from 0.1% quarter on quarter to around 0.5% with the annual rate falling to around 1.3% to 1.8%.
Data releases this week will include May’s house price figures later today, car sales late in the week, Australian Bureau of Statistics retail sales data for April tomorrow and April’s trade on Thursday.
Today sees the ABS releasing business indicators for the March quarter, including wages, sales, and inventories while tomorrow sees the March quarter current account figures and government finance data, also for the three months to March.
All feed into the March quarter national accounts on Wednesday.
The record closing Aussie 10 year bond yield of 1.45% on Friday told the interest rate story – the market knows the RBA will cut the cash rate tomorrow by 025% (could it go the whole hog and cut by half a percent to send a powerful message about the problems it seems coming down the track?).
The yield fell 7 points in a week and 32 points (0.32%) in May alone as the RBA, through a speech from Governor Phillip Lowe and the second Statement on Monetary Policy for the year changed course towards a rate cut tomorrow and possibly another in August or September.
Governor Lowe is due to make a major speech on Tuesday night in Sydney to explain the new monetary policy stance.
The reasons for the looming rate cut aren’t hard to understand – weak inflation, weak wage growth, weak growth in household income, high household debt, weakening house prices and indifferent business and consumer confidence.
Watch bank share prices come under pressure because they will be under pressure to cut variable home loan rates (most have already cut their fixed home loan rates).
Watch for some banks not to pass on the full RBA cut (0.25% is the estimated cut at this stage). The banks will want to protect their net interest margins and their shareholders who are already facing rising doubts about full-year dividends from the big four.
We will know more on Wednesday with the second major release this week – the March quarter’s national accounts and GDP.
Only the trade account is doing well – booming in fact, thanks mostly to a 35% surge in iron ore prices since the January mine dam disaster in Brazil slashed global supplies of the steelmaking rate material.
But that showed the first signs of aging late last week with a 7% fall in three days. LNG prices have already come off the boil, as have prices of thermal coal while coking coal prices remain solid.
The AMP’s chief economist, Shane Oliver thinks the 3% rise in the minimum wage (from July 1) will add to the RBA’s rate cut push. The rise was less than last year’s 3.5% rise.
“So with around 20% of the workforce (those on awards) getting the minimum wage rise it actually implies a 0.1% pa fall in overall wages growth over the year ahead (ie from 2.3% year on year down to around 2.2%yoy) all else equal. Expect wages growth to remain soft,” Dr. Oliver wrote at the weekend.
“The combination of slower growth in the minimum wage, falling building approvals, soft credit growth, falling March quarter investment and likely only modestly rising capex in 2019-20 leave the RBA on track to cut rates on Tuesday by 0.25% with further cuts to follow,“ Dr. Oliver added.
So far as the March quarter GDP, Dr. Oliver says he expects it to show continuing weak growth of 0.5% quarter on quarter or 1.8% year on year thanks to weak consumer spending and investment and falling housing construction.
David Bassanese from BetaShares forecasts 0.3% quarterly growth and only 1.6% growth over the year). “ hat will make for sober reading, and clearly justify the RBA’s now widely expected decision to cut rates one day earlier.
“For the record, I now anticipate the RBA will cut rates thrice this year – next week, and then in August and November – taking the official cash rate to 0.75%,” he wrote in his weekly note on Friday.
The National Australia Bank sees quarter on quarter growth of 0.4% and annual growth around 1.7%.
Markit Economics says it expects Australia’s economic slowdown will be cemented by the March quarter data. “We look for GDP growth to have hit 0.6% q/q, after the December quarter’s 0.2%. This drags the annual pace down to 1.9% from 2.3% in the December quarter.
