Reserve Bank of Australia Hikes by 25 bps, Sees More Rate Increases Coming
Economic news and commentary for March 7, 2023
Reserve Bank of Australia Announcement
The Reserve Bank of Australia increases its cash rate target by 25 basis points to 3.6%. This is the fifth quarter-point rate hike since October 2022 and takes the total amount of hiking to 350 basis points. The cash rate sits just 115 basis points below the most recent highs in 2011, and there seems to still be more tightening to come. In the statement, the RBA says that it "expects that further tightening of monetary policy will be needed to ensure that inflation returns to target" of the 2-3% range. This stems from a view that inflation is not expected to reach its target until mid-2023 when it reaches “around 3 percent” despite prices declining this year and next. The RBA appears to be wary of services inflation, especially rent inflation, as it cites strong demand in that sector as keeping these prices particularly high. However, it also says that “inflation has peaked.” The messaging is a bit convoluted here. The bottom line seems to be that the deceleration of inflation is going to take a long time, and markets should not declare victory too quickly. In contrast to the views on inflation, the RBA is slightly more negative on its expectations of growth saying that it expects the economy to grow at a “below trend” rate over the next couple of years.
Where will the RBA go from here? It appears that Governor Lowe has signalled that at least one or two more rate hikes are coming, though the timing is less clear. This would put the terminal rate above 4%, closer to the highs of 2011. However, growth has already started to weaken significantly, so pauses are likely not off the table in the first half of 2023.
Germany Manufacturing New Orders
German manufacturing new orders grew 1.0% MoM in January but were still down a dismal -10.9% YoY. The increase was due to some large-scale orders coming from outside of the euro area in the aircraft sector, potentially related to the increase that the US saw in its own factory orders. As a result, non-euro area orders jumped 11.2% MoM, and capital goods orders jumped 8.9% MoM. In most other areas, the report was weak. Domestic and euro area orders dropped -5.3% MoM and -2.9% MoM respectively, reflecting the weakness in the local industrial sector. Intermediate goods and consumer goods orders tanked -8.9% MoM and -5.5% MoM. Some of these declines might have been a result of a strong December where new orders grew 3.4% MoM. But for the most part, these gains were reversed in the domestic and euro area. Real manufacturing turnover was also pretty weak, up just 0.2% MoM. This data backs up what relevant manufacturing data in PMIs and business surveys has shown. Despite stabilizing in recent months, there is still significant weakness in Germany’s manufacturing sector as a result of weak economic conditions in Europe.
Still to come…
10:00 am (EST) - US Wholesale Inventories
3:00 pm - US Consumer Credit
Morning Reading List
Other Data Releases Today
Australia's trade balance fell -$1.3 bil to $11.7 bil in January with exports up 1.4% MoM and imports up 4.6% MoM. Travel exports continue to rise, up 3.7% MoM. Consumer and capital goods imports surged, up 11.7% MoM and 10.0% MoM respectively.
The UK Halifax House Price Index grew 1.1% MoM and 2.1% YoY in February. In the last three months, prices fell -2.5% QoQ. A decline in rates pushed average property prices up slightly from £282,360 in January to £285,476 in February.
US
The rise and (upcoming) fall of US “resilience” (CIBC) - The economy’s ability to press higher in the first quarter may be more of a delay in its sentencing than a get out of jail free card. It does add to the risk that the Fed will press on with as many as three quarter point hikes, but the central bankers need to be wary about putting too much emphasis on economic resilience driven by factors that will lose steam as we move deeper into 2023.
February US jobs report preview – was January a fluke? (ING) - Half a million jobs were added according the the January employment report, yet the raw data suggests it was more a case of warm weather reducing the ususal seasonal firings with favourable seasonal adjustments providing an additional boost. February is likely to revert to the 200k trend with downside risks for coming months as lay-offs rise.
What Happened to the Recession? (First Trust Portfolios) - We obviously hope there is no recession on the way. It’s pretty obvious that the stock market isn’t worried. But January’s economic data aren’t as clear as many might think.
US Weekly Economic Commentary: Inflation elevated, rates headed higher (S&P Global) - As the data on growth and inflation have rolled in, the risk of an imminent recession has receded, and the risk of imbedded high inflation has risen. This implies the possibility of tighter, perhaps much tighter, monetary policy, and a later but more severe downturn later this year or early in 2024. A recession averted may only be a recession delayed.
China
China’s imports unexpectedly enter deeper contraction (ING) - China's exports and imports continued to contract in the first two months of 2023. Imports have fallen despite the fact that China has lifted its Covid-19 restrictions. This reflects the fact that the market did not anticipate a slower pace of infrastructure recovery.
NPC sets modest growth target at ‘around 5%’ (Danske Bank) - At the National People’s Congress, China settled for a growth target of 5% in 2023. It was at the low end of expectations and suggests that China will not deliver major stimulus this year, but has an eye on long-term sustainability of growth. We still look for 5.5% growth this year, though, but with risks now more balanced rather than to the upside. The softer target reduces some of the global inflation concerns from the Chinese reopening, but not all of them.
Mexico
Mexico | Significant contraction of net FDI in 2022 (BBVA) - We expect the trade balance to show a lower deficit this year under the expectation of lower GDP growth when compared to 2022. To promote both nearshoring and FDI flows into Mexico, the country will have to invest more in electrical infrastructure and, particularly, in transmission lines.
Inflation
A Real-Time Assessment of Inflation Nowcasting at the Cleveland Fed (Cleveland Fed) - Using a model based on staff research, the Cleveland Fed’s website provides daily nowcasts—or near-term predictions—of multiple US inflation measures for public use. In this Commentary, we compare the historical predictive accuracy of the model behind those inflation nowcasts with the accuracy of inflation nowcasts coming from competing sources: surveys of professional forecasters and alternative statistical models.
Inflation Monitor for March 6 (BMO) - Inflation pressures generally remain persistent.
Manufacturing
Global manufacturing PMI rises further in February on China's reopening (ABN AMRO) - The February manufacturing PMIs published last week resulted in the global index showing the second monthly rise in a row, moving back to the neutral 50 mark separating expansion from contraction (January: 49.1). This improvement was led by emerging markets (EMs), particularly China.
Global economic growth accelerates to eight-month high in February (S&P Global) - Global business activity grew at its strongest rate for eight months in February, reviving further from the low seen last October, according to the S&P Global PMI surveys based on data provided by over 30,000 companies. Growth was led by the service sector but was also buoyed by a return to growth of manufacturing output.
Employment
Global employment picks up but persistent staff shortages drive up salary costs (S&P Global) - Global jobs growth accelerated to a six-month high in February as improving demand conditions and rising business confidence encouraged greater hiring, with job gains reported in all major economies bar Brazil.
Central Banks
Macro Insights: Central banks on the agenda – RBA, BOC and BOJ (Saxo Bank) - While the focus stays on Fed, Powell and treasury yields, we get the first few central banks this week taking a less hawkish turn. Reserve Bank of Australia’s dovish hike may be followed by Bank of Canada’s pause, but the key message has remained around policy flexibility rather than claiming a victory on inflation. Comments suggest that central banks are not convinced about disinflation and continue to keep the door open for more rates hikes in Q2/H2.
FX
FX Talking: Dollar decline takes a raincheck (ING) - As we enter March, what has become clear to financial markets is that inflation is proving far stickier than most had felt at the start of the year. The dramatic re-pricing higher of global money market curves has lifted the dollar and presented an increasing headwind to risk assets. A return to the disinflation and weaker dollar narrative will have to wait.
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