Macro Micro – RBA happy to remain ‘perched’

Markets are rapidly approaching the pinnacle point of half year.

On the macro front – Thursday marks the start of a massive February as it will be the first meeting of the calendar year for most central banks – the festive season break may not have been a pleasant one for most as the USD continued to crash over the break and the bond market arched up – the ECB, RBA, BoJ – actually take your pick here all are mulling over FX headaches.

This week see the Fed meeting for its first meeting of the year, there won’t be a movement in rates being a non-press conference meeting, it is however, the final meeting for incumbent Chair Janet Yellen. I for one will miss her at the helm of the world largest central bank. Her steady hand took much of the volatility out of markets that could have been created during a particularly eventful period.

Her tenure is highlighted with communication of the highest order while overseeing differing policy stances throughout her four-year term. She started by picking up from previous Chair Ben Bernanke’s QE programs, to the beginning of the unwinding of QE (Quantitative Tightening QT) and to oversaw the first rate rises in the US in the post-GFC era.

Therefore, Thursday’s meeting may be interesting not from the rate announcement but from the statement; could it be a ‘signoff’ piece defending her handling of these events over her time? Either way markets (should) always be look forward anything that is really said at this meeting as its retrospective and form a previous administration – statements from incoming Chair Jerome Powell are all that really matter.

Data releases this week – Q417 GDP numbers: it was the US was last week its Europe this week – is the renaissance under way? That is the biggest question in the synchronised global growth story. Staying on quarterly releases Europe and Australia both see the release of their respective Q4 inflation numbers – Australia’s inflation is of particular interest from a monetary policy perspective being the RBA’s core mandate. Rate rises in developed markets has been a constant discussion point since mid-2017 – the suggesting being that G10 central banks in particular could possibly synchronise rate increases in 2018 as global growth increases. However, this ignores the domestic scenarios and Australian CPI on Wednesday and for most the year (in my view) will illustrate why the RBA will remain on the fence.

Here is Australia’s inflation reads dating back to December 2012.

Source Data: ABS

The yellow line is the seasonally adjusted headline CPI figures which are heavily influenced by fresh produce and energy – the RBA likes to strip these out and concentrate on the trimmed mean figures – the thinker blue line. I have added the blue shaded area, this represents the RBA’s target band for trimmed mean inflation.

It is a perfect illustration of why the RBA is unlikely to move – trimmed mean inflation has not crossed into the band since the final quarter of 2015 and has flat-line for the previous three quarters. There are plenty arguing that because of housing, domestic growth and global factors rate should be raised – however it misses the point of what the RBA (and most central banks for that matter) is for – maintaining inflation. It’s actually possible to make an argument for lowering rates considering inflation isn’t materialising. However, this is when housing and growth factor, as it would create overheating in these areas and a possible over-leveraged scenario (housing market) balloon into something far more dangerous.

I would also highlight the last Statement of Monetary Policy (SoMP)which forecasted core CPI to reach 1.75% by December 2018 and only 2% by December 2019 –further flat-lining from the trimmed mean read will all but confirm inflation will remain benign and the RBA can and continue ‘perch’ itself on the fence as it has done for the past 17 months and counting.


Evan Lucas is an expert guest contributor to Fairmont Equities.

Evan is founder of The Lucas Review. Prior to that he was Market Strategist at IG. He is well known as an expert commentator in finance media such as Sky News Business, ABC1, the Australian Financial Review, CNBC, and Reuters.

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