Original insights into market moving news

Week in Focus; week commencing 6 May 2019

  • Monday: UK Holiday
  • Tuesday: RBA Monetary Policy Meeting, EIA Short-Term Energy Outlook, Australian Retail Sales and Trade Balance, German Industrial Orders and Output, Japan returns from Golden Week Holiday
  • Wednesday: RBNZ Monetary Policy Meeting, Brazilian Central Bank Monetary Policy Meeting, JMMC Meeting, China Trade Balance
  • Thursday: Norges Bank Monetary Policy Meeting, US International Trade
  • Friday: UK GDP Prelim, Canadian Jobs Data



The RBA’s 7 May rate decision is in the balance. A tug-of-war between soft inflation and a firm labour market has prompted some to call for a 25bps cut to the Cash Rate to 1.25%. The central bank’s language has turned increasingly dovish in recent months, with the April Minutes highlighting that “members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstance”. Recent data shows that employment increased by a solid 25.7k, topping estimates, albeit the unemployment rate ticked up to 5.0% from 4.9%. Meanwhile, CPI was flat Q/Q in Q1 vs. market consensus of 0.2%, while the annual rate eased to 1.3% from 1.8%. Thus, many desks have tilted towards a rate cut this year, while some also reeled-in expectations. Citi, JP Morgan now see rate cuts in May and August, whilst RBC have tweaked their rate cut call to May and November from a prior August and September. Similarly, analysts at Capital Economics expect the Board to cut the Cash Rate by 25bps at the upcoming meeting, and note that the central bank will not wait much longer before providing additional stimulus. Whilst many are calling for a May cut, Westpac still stands by its call for an August and November rate reduction, on the grounds that “RBA Board will adopt a clear easing bias at the May meeting, prior to cutting rates”.


The Reserve Bank of New Zealand will publish its latest policy decision on 8 May. Money markets now price a 50%+ chance of a 25bps OCR cut to 1.50% following the latest batch of employment data, although a distinctly mixed report (marginal decline in unemployment but slower job growth and lower participation rate) did not provide the RBNZ a clear steer ahead of the decision. At the March meeting, the RBNZ surprisingly stated that the next move in the OCR would likely be a cut (a shift from its previous neutral bias), citing softer activity in Australia, China, Europe and slower domestic growth. Analysts at ASB believe that the string of soft economic data (GDP growth below potential, inflation below the mid-point target) will be enough to tilt the CB towards a cut, especially having shifted to a dovish bias. Meanwhile, Westpac reeled in their RBNZ cutting forecast to next week, having previously expected the RBNZ to keep rates unchanged for the next 3 years.


South Africans will on 8 May go to the polls. Polling data is thin for South Africa, but one recent survey showed the incumbent ANC is polling at around 61% (vs 62.15% in the May 2014 election). Analysts have suggested that President Ramaphosa will need a strong electoral mandate as a precondition for delivering any meaningful economic reforms; UBS notes that still is no guarantee that they will pass. Assuming an outcome in line with the polls, following the election, the next step for the president would be to announce his new cabinet and then focus on tackling the problems posed by a lack of business confidence, state owned enterprises and slow progress with structural reforms. UBS believes that there are three key signposts for traders to watch: a) revival of business confidence and in turn private investment spending, which is a necessary condition for growth to accelerate towards 2% by 2020, b) SOE reforms, with particular attention to Eskom and c) land reform and other structural reforms (dealing with skill shortages, labour market liberalization, and efforts to improve government revenue generation). Finally, UBS says, bullish investors are looking for a combined boost of a strong mandate for the ANC coupled with a stable outlook from Moody's after the election. "This appears to be the modal expectation in our view, so we see how the ZAR can perform reasonably well in the coming weeks," the bank writes, "nevertheless, we think that Moody's decision will remain the focus of the markets in H2 2019, when the rating agency would have a better ability to assess the impact of any policy changes after the election."


Thursday 2nd May will see the Norges Bank hold their rate decision wherein they are unanimously expected to keep rates on hold at 1.00%, with most analysts expecting a reiterated intention to hike by 25bps in June. On the data front, Norway continues performing strongly on growth and inflation, with the most recent regional network survey pointing to robust Nordic growth (Q4 Mainland GDP currently at 0.9% vs. exp. 0.7%), headline inflation continues to run well above the NB’s target (Mar. YY 2.8% vs. 2.0% target; note the NB have a +/- 1% tolerance band) with core inflation also unexpectedly accelerating in March (YY 2.7% vs. exp. 2.5%). PMIs paint a worse picture, however, with the disappointing 53.8 print (vs. exp 57.2 & prev. 56.3) stymieing the overall strong economic showing from the Scandinavians, and highlighting some concerns for the future, as according to Oxford Economics. Another hiking roadblock comes in the form of the normalisation pauses at the ECB and the Fed, but the oil-rich Scandinavians may find solace in their major export rising 8% since the last meeting. Combing the aforementioned factors with an overall weaker currency has led Oxford Economics to conclude that a hike in June will be reiterated a opposed to pushed back to September, with NWM sharing similar sentiments and favouring NOK outperformance vs SEK, EUR and USD.


Analysts expect 1k jobs were added to the Canadian economy in April, not fully offsetting the 7.2k decline in March; the jobless rate is seen unchanged at 5.8% for the fourth consecutive month, and the participation rate is also seen unchanged at 65.7%. Canadian bank RBC's analysts are more optimistic than the consensus, however, and see 5k jobs added. It says that "despite the March decline, recent job gains (213K over the past 6m) still look too strong, and another below-trend print looks warranted." The bank notes that employment in the food/accommodation services sector (-42K over past three months) has been the notable laggard, though it notes that services overall are responsible for more than 90% of the 6m job gains.  RBC observes that wages for permanent workers was continuing to rise in March (running at a clip of 2.3% Y/Y), and seems to be moving in the opposite direction of its own tracking of the wage-common measure at 2.0% (the wage-common measure is the BOC's preferred gauge of wage growth). "Employment growth (+1.8% y/y) combines with the somewhat underwhelming wage growth to leave labour income gains relatively solid," RBC writes, "with a low savings rate (1.1%) and high household debt levels (174% of PDI), this will need to continue to support even modest consumption growth."


Although the Fed downgraded its assessment of inflation in its most recent policy statement, Chair Powell at his post-meeting press conference argued that the weakness in inflation was transitory. The Fed's preferred measure of inflation is PCE (which has fallen from highs around 1.95% Y/Y in December, to 1.55% in March), but traders will still look to the CPI over the months ahead for signs that the weakness was indeed transitory. The Street looks for CPI at 2.1% Y/Y in April (from 1.9%), and the M/M measure is seen at 0.4%, matching the prior monthly pace; the core gauges are seen at 2.1 Y/Y from 2.0%, and 0.2% M/M from 0.1%. UBS says that, among the components, it projects that services inflation in April will likely be similar to March (it sees 0.23% vs 0.25% in March), and sees tenant rents and owner equivalent rent again posting "solid" 0.3% increases. There will be some attention on apparel prices after the large fall in March, and UBS sees a flat reading in April, adding that it sees the March decline due to changes in some of the source data used by the BLS, not a general downtrend in apparel prices. UBS sees other goods categories weakening somewhat, and it does not expect another strong increase in tobacco prices like in March, or even in stationery and gift wrap (like we saw in other recent months that may have been related to the pass-through of tariffs on imports from China of these products, the bank says).