The market is expecting the RBA to deliver an early Christmas present to mortgagees by cutting the official cash rate (OCR) to 3.00% from 3.25%. Rate cut bets have steadily increased after the RBA boldly stated at its November meeting that more policy easing may be necessary in the future, leading some to point towards high inflation during the September quarter as the reason why the RBA left the OCR unchanged at its last meeting. Yet, until today domestic data over the last month hadn’t deteriorated enough to force the RBA’s hand, in fact it printed better than expected in some cases. However, poor retail sales data this morning may be enough to tip the scales in favour of a rate cut tomorrow, at least from a domestic standpoint. Offshore, the situation is mixed, with very fragile economic and political situations in Europe and the US but a positive feel from China.
Mixed signals from abroad
Over the last few months China has all but confirmed what most economists already suspected, growth would turn a corner this quarter. Recent data out of the world’s second largest economy has signalled a pick-up in sentiment in the heart of China’s economy, the manufacturing sector (PMI printed at 50.6 for November and 50.2 in October, with a number above 50 representing expansion), as well as positive leads from industrial profits, exports and retail sales data. However, there is still a lot of uncertainty surrounding the European debt crisis and the fiscal cliff in the US, both of which pose a threat to the Australian economy. If politicians in the US don’t successfully negotiate the fiscal cliff the US economy, and the world for that matter, may face a recession. The political wrangling in Europe also concerns the RBA.
Today’s retail sales data multiplied bets of a rate cut
On the domestic front, economic data has been mixed. Whilst we witnessed a drop in the Australian unemployment rate, it was tarnished by a decline in the labour force participation rate. Also, the fall in job advertisements (2.9% decline during November and a 4.6% fall in October) paints a worrying picture of Australia’s labour market further down the track. If hiring doesn’t pick-up more people may give up looking for work. Retail sales during October also disappointed the market, with sales failing to improve during the month despite the RBA’s cuts earlier this year. Overall, the data isn’t overly bad but it isn’t what the market would expect to see after the RBA’s previous attempts to simulate the economy.
Furthermore, the Australian dollar remains at detrimentally high level and there are concerns surrounding the future of the mining sector. The RBA and some within the resources sector have raised concerns about the demand for Australian resources going forward. Whilst demand is expected to remain strong, the days of steroid driven hording from China are over. Furthermore, falling commodity prices are hitting company profits at the same time as exports are becoming less competitive due to the high Australian dollar.
On balance domestic data provides scope for a rate cut and inflation doesn’t limit the RBA’s options, whilst the uncertainty surrounding the US and Europe creates potential headwinds for the Australian economy down the track. Hence, we see scope for a 25 bps rate cut tomorrow.