Local events will dominate Australian markets this week for a change with investors watching closely for the Reserve Bank’s (RBA) decision tomorrow and Wednesday’s third quarter GDP report and National Accounts.
In terms of the local markets and investors, nothing else will matter, even though we are likely to get some backwash from the US markets and the confusion over the shape of monetary policy from the Fed.
China’s Covid policy easing could also add some positive news to the mix for commodity companies and investors.
The RBA will lift the cash rate by 0.25% to 3.1%, a target many had specified for the end of 2022 when the rate rise campaign started earlier this year.
If that turns out to be the case the RBA will have lifted rates 8 times this year for a total rise of 300 basis points.
This will exceed the 1994 tightening cycle (of 275 basis points, spread over 5 months) and will equal the 2002-2008 tightening cycle (which amounted to 300 basis points but spread over 71 months).
Economists at Moody’s think the central bank will lift the cash rate by 0.25%.
AMP Chief Economist Shane Oliver reckons this increase could be it for a while.
In his weekend note, he pointed out that the RBA has referred to the prospect of a pause in rate hikes six times in public comments (that’s in speeches, answers to questions, testimony to Senate estimates) in the last month “and the dip in monthly inflation in October means that a pause is possible and would not be surprising.”
“But another rate hike is more likely because: the RBA has said that it expects to raise rates further; recent wages and jobs data have been stronger than expected; while the October CPI rise was softer than expected it doesn’t include the impact of rising gas and electricity prices and so likely understates inflation; there is a rising risk of a “prices-wages spiral”; and the RBA doesn’t meet in January which argues against a pause in December.
“But given RBA concerns about the lagged impact of rate hikes, next year’s “fixed rate mortgage cliff” and increasing evidence of slowing global and Australian growth (with rising recession risks) another 0.25% hike is most likely as opposed to a reversion to a 0.5% hike,” he predicted at the weekend.
“A pause remains likely from early next year with the cash rate likely to peak in the low 3’s – our base case is that 3.1% is the peak, but the risk is 3.35% given the rising risk of excessive wages growth.
“But either way, by early next year there should be enough evidence indicating growth is slowing sharply and inflation is peaking enabling the RBA to go on hold. Consistent with this we expect the RBA to soften its forward guidance to allow for further tightening as well as a pause going forward.,” Dr Oliver added.
On the data front in Australia, Dr Oliver says the September quarter GDP on Wednesday) is likely to show a slowing in GDP growth to 0.3% quarter on quarter (qoq) from 0.9% qoq in the June quarter.
He said this will reflect “reasonable growth in business and dwelling investment but a slowdown in consumer spending and a negative contribution from net exports.”
He said annual GDP growth will spike to 5.9% year on year (yoy) but this is due to the base effects flowing from the contraction in the economy a year ago due to lockdowns and such a high reading will be very misleading.
Moody’s economists were more optimistic, forecasting quarter on quarter growth of 0.9%.
One thing that will be weak will be the small, 0.2% rise in retail sales volumes in the September quarter which is a good pointer to the weakness in household spending.
Our terms of trade and therefore nominal GDP will come under some pressure as well.
Trade data for October (Thursday) is likely to show a lower but still large trade surplus – the RBA’s commodity prices index fell 6% in Australian dollar terms in November, which is a guide to the performance of the trade account.
Before the national accounts we get data for wages, salaries and inventories for the September quarter, the current account for the same period and government finance statistics as well.
There’s also data on industrial disputes for the September quarter.
Overseas, it’s a quiet week after the excitement about Fed chair, Jay Powell’s speech and the market reaction to the stronger than expected jobs data for November.
The US sees more discussion in markets about the Fed’s possible move at its meeting next week, while there will the monthly survey of service sector activity in the US, Australia and other major economies.
The US also sees the producer price data for November – ahead of the Consumer Price Index the following week (on December 13) and trade data for October.
European retail sales data will be issued this week and will give a view of the how EU household consumption is doing and whether it had been hit by the sharp rise in energy costs.
China’s trade data for November on Friday is likely to see a further slowing in exports and imports & inflation data is likely to slow further. Watch also for developments on Covid policy.
