Last week’s Australian jobs report saw the odds of a May rate cut from the RBA –already low — get trimmed even further. Employment growth topped expectations, rising by 26,100, while the unemployment rate tumbled to 5.7%, a low last seen in September 2013.
Many of those who were calling for a rate cut pushed their forecasts back to August or later, while cash rate futures pushed the odds a 25 basis point cut being delivered in May to just 18%.
While they admit the odds of a near-term rate cut are now lower, CBA’s fixed income strategy team — led by Adam Donaldson — believe it’s still too early to completely write off the prospect of a rate cut on May 3.
We wrote last week that we thought the RBA was in play for a May rate cut if both the labour force data and the CPI were sufficiently weak, but that the more likely option was for an August rate cut. We’ve seen nothing since then to change the core view. Total net jobs growth of +18.9k since November is hardly strong. Yes, the labour force data showed a drop in the unemployment rate, but that drop was largely driven by the fall in the participation rate. To steal the RBA’s line regarding the AUD, the labour force is a complication, not an answer.
Although many saw the strength in the jobs report as a reason for the RBA to maintain a steady cash rate at 2.0%, Donaldson and his team suggest that a “truly poor” CPI report reading next week could still force the RBA’s hand.
We still think that a truly poor CPI result could trigger a May rate cut. That would probably mean core outcomes averaging around 0.3% in Q1, which would deliver a 1.75% annual rate. That’s low, and unlikely, but not impossible given the sharp 0.9% drop in NZ’s tradables CPI reported today, and the correlation it has with the Australian counterpoint.
The chart below, supplied by the CBA, reveals the quarterly change in New Zealand tradable inflation — those prices influenced by offshore factors — compared to tradable inflation in Australia.
Even if the CPI reading doesn’t come in below market expectation next Wednesday, CBA’s strategists suggest the prospect of continued Australian dollar strength could place even greater downside pressure on inflation in the quarters ahead, adding to the case for further rate cuts from the RBA as a consequence.
“If the CPI does not provide that ‘smoking gun’ then a cut later in the year is still on the cards,” says the bank. “The problem for the RBA is that an ‘on hold’ stance would likely prompt further strength in the AUD, which has turned from an inflationary force to a disinflation story. That is problematic when your starting inflation point is at the bottom of the target band and the previous 25% in the AUD TWI is receding into the rear vision mirror.”
“From that position, continuation of these modest labour force trends would result in a lower cash rate.”
The vast majority of economists – including those from the CBA’s own economics team — forecast that the cash rate will remain at 2.0% for the remainder of 2016.