Tomorrow’s RBA November monetary policy meeting is big news here this week that should see it leave the cash rate at 0.10% and finalise the last set of economic forecasts for the year, but what the US Federal Reserve decides and announces early Thursday morning, as well as the much-tipped rate rise from the Bank of England on Thursday night, will also dominate should anything major come to pass.
Unlike those in the US and Europe, the Australian stockmarket has not taken all the interest rate / inflation talk in its stride.
The woes in China, fears about the impact of Covid Delta, domestic political brawling over climate change policies for the Morrison government and misplaced fears about rising costs saw the ASX 200 hardly move in October.
Nevertheless, the RBA is expected to toughen up the wording of the post-meeting statement from Governor Philip Lowe tomorrow and provide a bit more detail about its forecasts for inflation for this year and next and for GDP and employment.
Those forecasts will appear in more detail in Friday’s final Statement on Monetary policy for the year.
AMP Chief Economist, Shane Oliver says the “RBA on Tuesday is expected to weaken its dovishness in response to the faster than expected reopening of the economy and the greater than expected rise seen in underlying inflation.”
“This is likely to see it bring forward its guidance for the first cash rate hike to 2023 and it may ditch or soften its 0.1% yield target,” Dr Oliver said in his weekly note at the weekend.
The bond bunnies and their mates in the business media and among business economists reckon the RBA has lost the plot and will have to put up rates because inflation is getting out of control (and so do other armchair economists) because the yield on the April 2024 bond rose above the 0.10% target and the yield on the 10-year bond surged to 2.08% by Friday.
But their reading of inflation was misplaced and did not understand what is driving it.
For example, the Australian Bureau of Statistics said on Friday that producer prices rose 2.9% in the year to September (and 1.1% in the quarter), the highest since December 2011.
But 52.9% of that rise was due to higher oil and fuel cos for refining. For the Consumer price Index, transport) fuel, petrol and diesel costs) were the biggest driver of the 0.8% quarterly rise and the 3.0% annual rise (down from 3.8% in the year to June).
That was a fall dismissed or ignored by the bond bunnies because the underlying inflation measures hit an annual rate of 2.1%, the highest rate since 2015.
But that is what the RBA wants to see. And as we saw in 2009 and again from 2014 through to 2020, oil and petrol prices can collapse and remain low for long periods of time and the bunnies and their friends in the markets ignore that as they fret about cost pressures.
Wages are not rising and what all the commentators do not admit that inflation is being driven by supply shortages or interruptions (the current shortage of wooden pallets for example and computer chips).
In short, it’s a failure of business to either plan and invest in enough capacity, or because capacity has been strained by the explosion in consumer demand as the pandemic lockdowns have ended.
The RBA wants to see wages rising by 3% or more and wants inflation in its current range (a touch higher for the underlying measures) on a ’sustainable’ basis in the 2% to 3% target range.
The AMP’s Dr Oliver says “On the one hand it (the RBA) is likely to point out that the rise in the trimmed mean inflation rate was narrowly based and impacted by various pandemic related distortions and that uncertainties remain about the pandemic but on the other hand it’s likely to be more upbeat on the growth outlook following reopening and is likely to revise up its inflation forecasts slightly in its quarterly Statement on Monetary Policy on Friday. ”
“This is likely to be consistent with further tapering in February next year and a weakening or end to the 0.1% yield target for the April 2024 bond sometime in the months ahead. Given its failure to defend the yield target in the last week it may announce its abandonment on Tuesday.
“But it’s hard to see the RBA reducing its dovishness on rates too much just yet preferring to wait and see how the recovery unfolds and whether the bounce in underlying inflation is sustained.”
The early retail sales data for September confirm that consumer demand continues to hold up, despite the lockdowns in much of NSW and Sydney and Melbourne plus the ACT.
Retail trade sales rose 1.3% in September, the ABS said for an annual rise of 1.7%.
ABS director of quarterly economy wide statistics Ben James said this was the first monthly increase since May, with significant falls in July and August on the back of Delta outbreaks.
“Retail turnover continues to vary by state, based on whether restrictions were imposed, removed or extended,” Mr James said.
ACT turnover fell 12% over the month and in Victoria there was a 2.1% decline putting the state back to its lowest level in almost a year. All other states recorded an increase in monthly turnover, led by Queensland at 5.2% and NSW at 2.3%.
“Queensland sales rose to their highest level ever,” he said.
Food retailing fell 1.4% over the month but household goods were up 4.3%. Clothing, footwear and personal accessory sales jumped 5.9%.
