The market pricing for a 25 basis point cut by the Reserve Bank of Australia (RBA) at their meeting tomorrow is currently sitting at 55%. The dramatic weakness in Australian inflation in the first quarter has greatly changed the calculus for the outlook on Australian interest rates. While it is unlikely that the RBA will cut rates tomorrow, the weakness in the economy that the inflation data is alluding to is likely to spread into other elements of headline economic data. And given this, 25-50 basis points of rate cuts in the second half of the year is looking increasingly likely despite the complications around Glenn Stevens slated departure in September and a 2 July election. There is also a strong case for Treasurer, Scott Morrison, to announce Glenn Stevens’s successor this week. Once an expected 2 July election is called, the Treasurer will have to wait until August to announce a new RBA governor, which would only give the markets one month notice before Stevens’ retirement.
The Aussie dollar is increasingly reflecting this changing perception towards the RBA’s policy settings, having lost 2.8% over the past eleven sessions. Although the dramatic collapse in the US dollar over the past week hides the significant weakening in the AUD of late.
However, the GBP/AUD cross has been much more responsive to the newfound weakness in the Aussie dollar. With three important technical crossovers evident on the Ichimoku Cloud indicators, which all increasingly signal that the GBP/AUD is moving into an uptrend. However, if the RBA leaves rates on hold as expected, these trends are likely to show a short term pull back, but one would expect the changing trend to reassert itself after some of the dovish market positioning readjusts itself.
Not only has headline CPI fallen to its lowest level since 2012, but key core inflation measures were even more worrying, with the Trimmed Mean CPI and Weighted Median CPI declining to their weakest levels on record.
The TD-MI monthly inflation gauge for April was released today, and it has dropped from 2.3% YoY growth in January to 1.5% YoY. But the trend in monthly inflation is pointing to another very weak CPI read in 2Q, which is likely to be enough on its own to warrant further rate cuts by the RBA.
The growth in part-time employment is covering up a deteriorating picture in the Australian job market. In previous periods where we have seen a major divergence between full-time and part-time job growth it has rarely boded well for the Australian economy.
Housing approvals in Australia are also dropping like a stone. The 3% GDP growth seen in 4Q 2015 was helped enormously by a big increase in housing related construction. However, housing approvals are already exhibiting negative year-on-year growth, and look set for a cyclical decline much like that of 2011-2012.
