Key insights from the week that was.
This week witnessed a significant change in the RBA’s policy outlook. Rate expectations also drove market outcomes offshore.
Beginning with the RBA, the April decision statement saw the Board shift from biding their time to patiently assess conditions to having enough confidence in the economy to consider raising rates “over coming months” – assuming the data flow continues to justify doing so.
Westpac subsequently revised our view for the RBA tightening cycle, not only bringing forward the first hike from August to June 2022, but also revising up our expectation for the cash rate at year end (to 1.25%) and the peak for this cycle (to 2.00% in June 2023, 25bps higher and 6 months earlier than our prior estimate). While the change in language from the RBA highlights a greater willingness to act against inflation risks, it is the state of the labour market that backs our revised view.
Since the March RBA Board meeting, the labour market has continued to outperform expectations, the unemployment rate falling from 4.2% to 4.0% in March. Surging job vacancies point to a further substantial tightening of the labour market ahead from levels already consistent with full employment. As outlined by Chief Economist Bill Evans this week, we now expect the unemployment rate to fall to a low of 3.25% by year end (previously 3.75%) and wages growth to peak at 4.0% in 2023 (previously 3.5%). Combined with the (historic) accumulated savings of Australian households, real wage growth will support expectations of demand and inflation through end-2023 and the series of rate hikes we are forecasting. In terms of the risks to the outlook for policy and the economy, note the RBA’s latest Financial Stability Review is due for release today.
Before moving offshore, it is worth noting that this week also saw the release of the latest trade data for Australia. In February, the trade surplus narrowed sharply against expectations from $11.8bn (previously $12.9bn) to $7.5bn. The surprise came as a result of a surge in imports (12.1%) spread across consumer and intermediate goods – arguably the consequence of the re-opening of Australia’s economy and the recovery of global supply chains. An additional negative versus expectations in February was that, instead of rising further, exports consolidated in the month. In contrast, higher commodity prices will see the value of exports rally in coming months, leaving the trade surplus back at, or above, record highs.
Then to the US. As the tone of data remained strong, comments from FOMC speakers continued to signal a consensus for urgent action. Most notable were those of Governor Lael Brainard who signalled an intent to run quantitative tightening (QT) at a much more aggressive pace in 2022-23 than in 2017-19. The March meeting minutes subsequently gave a clearer view of the planned pace of QT, with the monthly caps for balance sheet roll-off likely to be ramped up over just three months to $60bn for Treasury securities and $35bn for mortgage-backed securities – roughly twice the caps of 2017-19. Combined with the rate hikes forecast by Westpac and the market, the net result will be a rapid normalisation of policy and a further tightening of financial conditions – from levels that are, arguably, already bordering on restrictive.
A full up-to-date assessment of the outlook for Australia and New Zealand, the US, Europe and China as well as commodities and FX markets will be made available today on Westpac IQ in our April edition of Market Outlook.
