Reserve Bank of Australia Raises Interest Rates Amid Stubborn Inflationary Pressures
Economic news and commentary for June 6, 2023
Reserve Bank of Australia
The Reserve Bank of Australia made another move today and announced that its policy cash rate would increase 25 bps to 4.1%. This is the second quarter-point rate hike that followed the pause in April and the seventh of this size since the RBA downgraded rate hike sizes in October 2022.
.The message today was clear. Despite inflation having peaked earlier in the year, it was not falling at a fast enough pace. Specifically, the RBA called the current rate of inflation “too high” and that “it will be some time before it is back in the target range.” The members of the RBA posited that further tightening would help to accelerate the rate of decline in prices such that inflation would reach the target in an acceptable timeframe. In particular, the RBA singles out services inflation as the culprit for sticky general inflation and points to a tight labor market and high wage growth, provoked by subdued productivity, as the underlying drivers there. Additionally, the RBA hopes to redress the possible impacts of high inflation expectations on keeping prices pressures around longer, so that it can achieve its goal. In the end, there was still no indication that a pause is the likely next step. Instead, the RBA indicated “some further tightening of monetary policy may be required” as it makes clear that it has a pessimistic view on the path of inflation.
Most of the world’s central banks had moved to be more data-dependent in the last few months, and the RBA was no different. It just so happened that the data guided it back into tightening mode as conditions did not improve and the inflation outlook worsened. This may be a trend that develops in other central banks’ decision-making processes as there are similar sticky inflation situations in other developed economies especially when it comes to the service sector and labor costs. The good news for Australia and its peers is that growth has not come down like many thought it would in response to the sharp tightening of global monetary policy that has happened over the last year, and this gives central banks like the RBA more room to operate on the upside of rates. The next inflation figures will be key for the next policy decision, but it is likely that members are already tilting towards a pause in the event that data is neutral.
Still to come…
10:00 am (EST) - Canada Ivey PMI
Morning Reading List
Other Data Releases Today
Japanese real household spending was down -4.4% YoY in April, down from -1.9% YoY in March. Durable goods spending is down -7.2% YoY, the lowest since August 2022. Services spending is down -1.9% YoY, negative for the first time since March 2023.
The Reserve Bank of Australia increased its policy cash rate by 25 bps to 4.1% today. "Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range."
The S&P Global Eurozone Construction PMI fell to 44.6 in May from 45.2 in April. New orders fell at the sharpest rate since December 2022 which helped supply chains improve for the 1st time since August 2012. Input price inflation also cooled to a 3-year low.
Euro area retail sales were unchanged on a MoM basis in April and down -2.6% YoY. Non-food sales grew 0.5% MoM and was offset by a -0.5% MoM drop in food sales and a -2.3% MoM drop in fuel sales.
After a slight dip to end 2022, the service sector expansion is showing no signs of stopping. As of March 2023, services production in the euro area grew 0.9% MoM and 5.6% YoY.
RBA Announcement
Australia’s Reserve Bank lifts cash rate again (ING) - This latest hike was not totally surprising given the backward steps from inflation according to the monthly data. Further tightening is not ruled out, but we think this may well be the peak for rates as we expect inflation to ease more substantially in the coming months.
US ISM Services
ISM Shows Services Sector Growth Slowed in May (TD Bank) - The ISM Services PMI index pulled back to 50.3 in May from 51.9 in April. This falls well short of the 52.4 percent reading consensus was expecting. This is the fifth consecutive month of expansion for the services sector, but optimism has been steadily eroding since late 2022.
ISM reports add to US recession fears (ING) - The US may be adding jobs in huge numbers but the key ISM business surveys cast serious doubt on how long this can last. The manufacturing ISM index is already indicating recession and the service sector will soon join it unless order books turn around dramatically.
The ISM Non-Manufacturing Index Declined to 50.3 in May (First Trust Portfolios) - Today’s ISM Services report showed a pullback in the rate of growth in the services sector, as the headline index declined to 50.3, below even the most pessimistic forecast. The two most forward-looking pieces of the report – new orders and business activity – both fell in May. While they remain in expansion territory, business activity fell to a new low for 2023 and new orders remains just a tick above its low for the year
US
June Flashlight for the FOMC Blackout Period: To Hike or Not to Hike, That Is the Question (Wells Fargo) - After raising rates by 500 bps since March 2022, the FOMC signaled at the conclusion of its previous meeting on May 3 that the tightening cycle may be coming to an end. That said, the Committee was careful to keep its options open regarding further tightening.
US Weekly Economic Commentary: Whew! (S&P Global) - The US economy avoided a potentially severe self-inflicted slump thanks to the deal last week over the debt ceiling. US equity markets rose on the news, and broad indices have also received a lift from strong advances in tech stocks.
Mixed jobs report keeps a Fed pause in play (EY Parthenon) - Job growth picked up some momentum in May, but beneath the strong headline print, the labor market showed some signs of loosening up. Growth in nonfarm payrolls was buoyant last month as the economy added 339,000 jobs — above the 253,000 monthly pace over the prior three months — and job gains in March and April were revised higher by a cumulative 93,000.
Jobs With Little Growth Means Less Productivity (First Trust Portfolios) - We have used the word “unprecedented” to talk about the economy during and after COVID. We have never before locked down economic activity, while printing trillions of new dollars to help finance trillions of extra government borrowing to pay people not to work. But now, it’s all over…the Federal Reserve has lifted rates, M2 is falling, and we’ve stopped paying people not to work.
India
India’s global ambitions (S&P Global) - It's a big year for India. It's become the world's most populous country. In September, it will host the G20 summit at a crucial time for global partnerships in a post pandemic world and an ongoing conflict in Ukraine. And in just about a year, voters will go to the polls in parliamentary elections.
Inflation
Central Banks Can Fend Off Financial Turmoil and Still Fight Inflation (IMF) - But there are trade-offs between price and financial stability during times of stress, especially when inflation is high.
Energy
OPEC+ meeting brings deeper Saudi cuts (ING) - It hasn't been an easy OPEC+ meeting for members. The group failed to come to an agreement on deeper cuts, but production targets have been set for 2024 and voluntary cuts were extended. The Saudis have also decided to make further voluntary cuts.
Saudi Arabia Pledges More Voluntary Production Cuts, OPEC+ Extends Prior Deal (TD Bank) -Saudi Arabia surprised markets once again. The world's top oil exporter announced an additional voluntary cut of 1 million barrels per day (bpd) for July. The move is an extension to April's promise of ongoing monthly output reductions totaling 500k bpd which began in May. This brings Saudi's total production to 9 million bpd over the period, the lowest level since early-2021.
PMI
Global growth at one-and-a-half year high in May as demand for services continues to revive (S&P Global) - Global growth hit the fastest for a year and half midway through the second quarter, according to the S&P Global PMI surveys based on data provided by over 27,000 companies. All major economies reported robust growth, in all cases bar India and Russia seeing service sector growth outperform that of manufacturing.
Construction
The Median Age of the Construction Workforce (NAHB) - NAHB analysis of the most recent 2021 American Community Survey (ACS) data reveals that the median age of construction workers is 42, one year older than a typical worker in the national labor force. Attracting skilled labor is still the primary long-term goal for construction, even though a slowing housing market has eased some pressure on current tight labor market conditions.
Markets
Dividend stocks – all-rounder in tricky times (DWS Group) - The relatively calm markets of the past two months should not hide a certain disorientation among investors, reflecting the great uncertainties on the economy and inflation. Dividend stocks may help investors weather economic storms.
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