Key insights from the week that was.
In Australia, the RBA’s August meeting minutes again reinforced the Board’s well telegraphed views on the economy. In short, there is “less spare capacity than previously assumed” given stronger momentum in demand and a weaker assessment of potential supply. The Board also noted that financial conditions appeared to have “eased modestly” over recent months, as house prices and credit growth had picked up. Alongside the uncertainty over the timing of inflation’s sustainable return to target, these judgements were central to the debate over whether to raise or maintain the cash rate at the July meeting.
While the case to leave the cash rate unchanged was deemed stronger, the decision was paired with a need to remain vigilant of inflation risks and guidance that “it was unlikely that the cash rate target would be reduced in the short term”, with the Board of the view that “holding the cash rate target steady at its current level for a longer period than currently implied by market pricing may be sufficient to return inflation to target in a reasonable timeframe”.
Chief Economist Luci Ellis’ essay this week assesses the judgements and points of uncertainty underlying the RBA’s decision making. To us it is evident that, while a “greater-than-usual weight” might be being placed “on the flow of data, relative to the forecasts”, it is only after the RBA judge labour market slack to have emerged that they will shift their stance on policy. We continue to expect 100bps of easing through 2025, beginning at the February meeting.
Offshore, it was also a quiet week, markets largely marking time ahead of tonight’s address to the Jackson Hole Symposium by FOMC Chair Powell.
Ahead of Chair Powell’s address, the minutes of the July FOMC meeting made clear that the Committee is very close to deciding the stance of policy is now unnecessarily tight and should be eased. In their discussions, members expressed growing comfort with the trajectory of inflation, with “some further progress… broad based across the major subcomponents of core inflation”. Supply and demand in the labour market was also regarded as coming into better balance.
Not known at the time of the meeting is that nonfarm payrolls over the year to March 2024 was 818k lower than initially estimated. While we won’t know the month-by-month profile until early next year, when this week’s initial revision is finalised, it is equivalent to the average monthly gain over the year to March 2024 being revised from 242k to 174k. Considering payrolls captures the number of jobs, which some people may have two or more of, and as population growth averaged 133k over the year to March 2024, it now looks as though the US labour market has been in balance for more than a year. This fits with CPI ex-shelter inflation holding at or below the 2.0% target since mid-2023.
Note though, activity growth is still characterised by the Committee as robust, so there is no cause for alarm. Instead, the tone of commentary from FOMC officials this week has remained measured, consistent with the “majority” view in the minutes that “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting”.
Of the other data released this week, the inflation readings from the Euro Area and Canada were most significant. Euro Area inflation outcomes for July were unchanged in the final release, prices unchanged in the month and up 2.6%yr. Constructive for the inflation outlook, the ECB’s wage measure also moderated to 3.6%yr from 4.7%yr three months earlier. Canadian annual headline inflation meanwhile edged lower in July from 2.7%yr to 2.5%yr as expected.
The data flow and commentary from officials therefore continues to point to rate cuts in coming months not only in the US but across most of the developed world, including the Euro Area, Canada and the UK.
