The RBA June Board meeting is not currently ‘live’
- The economic data released since the May Board meeting does not support another rate hike in June.
- In addition, our assessment is that the 2023 Commonwealth Budget does not add to inflationary pressures in the economy.
- We currently ascribe a 90% chance to no change to the cash rate in June and a 10% probability to a 25bp rate increase to 4.10% (we consider the risk of any other move immaterial).
- Our attributed probabilities to the above outcomes mean that we currently don’t consider the June Board meeting ‘live’.
- The April monthly CPI indicator, due for release on 31 May, would need to print much higher than expectations for us to characterise the June Board meeting as ‘live’.
- Our central scenario puts the current 3.85% as the peak in the cash rate, while the near term risk sits with another rate hike (July or August are more likely to be the next potential meetings of a move higher in rates).
- We continue to expect 125bp of rate cuts by end 2024 that would take the cash rate to 2.6% – a more neutral setting.
The RBA Board meet on Tuesday 6 June. Recall that the RBA raised the cash rate by 25bp in May to 3.85% (a move we anticipated, but one which surprised markets given a negligible 12% chance of a 25bp hike had been priced).
We will publish an RBA preview next week ahead of the June Board meeting. But given the recent data flow we thought it timely to discuss how the economic landscape has evolved so far over the month. Current forward guidance from the RBA May Board Minutes is that, “members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve”
As we noted at the time, our take on this forward guidance is that the Board is willing to raise the cash rate again in this cycle. But another rate increase would require the economic data, particularly around inflation, GDP, the unemployment rate and wages/unit labour costs, to come in stronger than the RBA’s updated forecasts. Put another way, we do not think the RBA will lift the cash rate again if the economic data prints in line or weaker than their forecasts from the May Statement on Monetary Policy (SMP).
Since the May Board meeting the main economic data that will feed into policy deliberations at the June Board meeting has come in slightly weaker than the RBA’s latest forecasts.
The 2023 May Commonwealth Budget has also been handed down since the May Board meeting. And our assessment is that it does not add to inflationary pressures in the economy (see here).
The run of recent data coupled with our take on the Commonwealth Budget means at this juncture we do not think the June Board meeting is ‘live’. The April monthly CPI indicator is still to print (due for release on 31 May). But unless there is a big upside surprise we expect the RBA Board will leave the cash rate on hold in June.
And that the decision should be relatively straight forward.
This note covers how the recent run of domestic economic data pertains to the near term outlook for the RBA.
Wages growth lower than expected in the March quarter 2023
The Q1 23 wage price index (WPI) rose by 0.8%/qtr. This was below consensus and the RBA’s implied forecast for Q1 23 of 0.9%/qtr.
To be clear, the annual rate printed at 3.7% in Q1 23, which was a touch above consensus expectations of 3.6%. But this was due to upward revisions to Q2 22 (0.79% to 0.86%) and Q4 22 (0.78% to 0.85%).
We are talking fine margins. But at this stage of the policy tightening cycle small margins matter. Most analysts and commentators were in agreement that the risk to the quarterly wage outcome was to the upside. So a downside miss was a surprise. And the pulse of wages growth has eased.
Annual growth rates can often mask changes in momentum. Base effects can play a big role in shaping movements in an annual rate that may either overstate or understate shifts in the pulse of an indicator.
In that context, it is often useful to look at a three or six monthly annualised growth rate. In doing so more weight is placed on the recent past. That is why the Q1 23 WPI was an encouraging set of figures in terms of the rate outlook.
The 0.8% quarterly increase in the WPI over the March quarter followed a same sized increase in Q4 22 (both ‘strong’ 0.8% increases of 0.84%). As such, the six-month annualised pace was 3.4% in Q1 23, below the annual rate of 3.7%. For context, the six-month annualised pace WPI in Q4 22 was 3.9% (see facing chart).
Looking at the data through this lens allows us to compare how the actual wages outcome compared with the RBA’s expectation. The RBA forecast the Q2 23 WPI to be 3.8%/yr. For this result to come to fruition the June quarter WPI will need to increase by 1.0%/qtr. Such an outcome would be quite a bit stronger than the two previous quarters. As such, we believe the RBA would have welcomed the most recent WPI. And that it came in a little bit below their expectations.
Employment down and the unemployment rate up in April
The monthly ABS labour force is colloquially known amongst financial market participants as the ‘labour force lottery’. The survey nature of the release means that on any given month a set of numbers can print that very much go against market expectations.
The consensus expected the unemployment rate to hold at 3.5% in April (CBA an increase to 3.6%). But according to the ABS the unemployment rate increased to 3.7%. There was a similar sized miss on employment. The market median centred on an increase in jobs of 25k. The actual outcome was a decline of 4.3k over the month.
The volatile nature of the monthly seasonally adjusted data means it pays to look at the trend. But of course trend data is based on the seasonally adjusted series. The benefit of the trend data is that it smooths out the monthly swings in the key metrics. This allows us to better gauge the underlying movements taking place in employment, unemployment and participation.
On that score, the data indicates the labour market is loosening. Trend employment growth has tracked sideways at ~25k a month over the past eight months. But this is not enough to keep the unemployment rate from rising on an unchanged participation rate given the very high level of population growth (see facing charts). As such, trend unemployment is rising.
The trend unemployment rate was 3.6% in April. If the current upward trend in the unemployment rate is maintained over coming months the unemployment rate will average 3.7% over the June quarter. This is above the RBA’s forecast for the unemployment rate to average 3.6% over the June quarter.
Much like the wages data, the margins and differences with the RBA’s forecasts are narrow. But the important point to note is that the recent wages and labour force data has come in a little weaker than the RBA’s expectations. And consequently this data supports our view that the cash rate will be left on hold at the June Board meeting.
Second tier labour market data also softening
Second tier data related to the labour market is also softening. Seek job advertisements declined by 1.4% over the month in April to sit 19.1% lower over the year. Applications per job ad rose 7.7% in March and are 72.6% higher through the year (applications per job ad are reported with a one-month lag).
The level of job ads has historically had a good leading relationship with the unemployment rate (see facing chart). More applicants per job advertisement makes it harder for a prospective employee to secure a job. It also makes it harder for the incoming employee to push for a higher salary. For context, the level of applicants per job ad is back to its pre-pandemic average.
According to Seek, annual growth in advertised salaries is strong. But there has been more modest growth in the past six months. As the supply of labour continues to outpace the demand for labour pressure on privately negotiated wage contracts, particularly at the individual level, will ease. This will be viewed by the RBA as encouraging and should alleviate the need for further rate increases given there is plenty of organic tightening still in the pipeline.
The April NAB Business survey also pointed to a softening in labour demand over the period ahead. The employment index has stabilised comfortably above its historical average. However, forward orders, which are a leading indicator in the survey, fell by 2pts to be +1pts, in line with its long-run average. This component typically leads the employment subindex by about three months. The sharp fall in forward orders since late 2022 could be an early negative signal for employment growth over the months ahead (see facing chart).
The inflation data next week
The monthly April CPI indicator prints next week (31 May). Our expectation is that the annual rate will be 6.4%. This looks like an acceleration in the annual rate of inflation given the monthly indicator in March was 6.3%/yr. But our expectation for a slight uptick in the annual rate is largely driven by base effects. Petrol prices rose by 3.0% in April 2023, but fell by 13.8% in April 2022.
It is worth noting that the new monthly CPI is volatile month to month. And it is an experimental series. It is also a partial read on inflation in any given month.
Not all components of the CPI basket are measured each month. Conceptually, the monthly CPI indicator includes all the items of the quarterly CPI basket. But not all items in the basket are updated with new prices each month.
The limitations of the monthly CPI indicator mean the May monthly print will be of particular importance. The April monthly CPI indicator out next week will only include up to date price information for 62% of the weight of the quarterly CPI. And the updated price information will be more heavily skewed towards goods prices.
The RBA is presently more concerned around services inflation. So we suspect it will be very hard for the April monthly CPI indicator to be the ‘smoking gun’ that shifts the balance towards a rate rise in June given the rest of the key data the RBA has put weight on so far over the month has printed softer than expectations.
It is worth noting that the April monthly CPI indicator will still sit below the benchmark quarterly CPI, which was 7.0%/yr at Q1 23 was.
We also note that final price growth edged lower in the April NAB business survey (1.1%/qtr). This was its slowest pace since April 2021. And retail price growth eased further (1.4%/qtr). Input costs were a little firmer, but final prices are what the consumer pays and are most closely aligned with the CPI. Margin compression often occurs when aggregate demand is softening.
The rate of inflation in the economy will not drop to the desired level overnight. But the data is encouraging and is directionally moving the right way. The case for additional RBA policy tightening is waning.
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