Among a host of critical directives both locally and abroad, the local week ahead will see domestic interest rates take centre stage with the RBA set to deliver their last policy decision for 2012. As of Friday, interbank cash rate futures imply an 83 percent chance Glenn Stevens and the board will slice a further 25bps off the official cash rate, equaling the all time low of 3-percent set in April of 2009.
If we cast our minds back to the Melbourne Cup day ‘hold’ decision, the ensuing statement and minutes gave the sense Stevens and Co were a little less relaxed on the inflation front then displayed in previous correspondence in light of the stronger than anticipated third-quarter inflation data. Nonetheless, while they may not have reiterated the domestic inflation environment provides “scope” for accommodative policy, there were hardly alarm bells sounding. Perhaps the use of the phrase rates are appropriate “for the time being,” is another way of saying ‘we’re ready to cut, but we’ll see how things pan out over the next month’. Furthermore, the final paragraph of the recent minutes release sums it up nicely, noting: “Members considered that further easing may be appropriate in the period ahead.” For some, this is as clear as any signal to suggest a rate cut is imminent, or at the very least the finger is on the trigger.
On balance, the local data pulse has outpaced expectations over the month of November. The unemployment rate held steady at 5.4 percent with tentative signs of a recovery on both the housing and retail fronts. Signs of stability in China, a stronger US data pulse and slightly lower Euro region risks may also strengthen the case for the RBA to stand pat. Still, one could only describe these signs of stability as tentative at best, given both sides of the Atlantic remain under arrest, courtesy of the US fiscal cliff and potential for a deeper growth slump in the Euro region.
Locally, perhaps last week’s capex data may have been the deciding factor for Governor Glen Stevens recommendation to the board. Although we saw a slight stronger than anticipated headline print, the investment intentions component of the data showed a 3.3 dip from previous estimates, led by an 8.1 percent drop in mining investment. Put this in conjunction with a stubbornly high exchange rate and a range of other negative themes and the case for a cut becomes a little more compelling. Markets, economists’ and pundits alike are calling for a rate cut, and although not a foregone conclusion, the evidence is in favor of the RBA taking out some insurance before an extended holiday (no meeting scheduled for January).
Data onslaught to guide A$ fortunes
The Aussie dollar will take direction from a veritable treasure-trove of themes this week, with the aforementioned RBA policy decision at the top of the list.
Monday’s releases include AIG Manufacturing data, TD securities inflation gauge, retail sales and ANZ job ads. Tuesday will see data on building approvals, current account balance and AIG Services data. The much anticipated third-quarter GDP report on Wednesday and equally as anticipated November jobs report on Thursday. RBA FX reserves and trade balance data will wrap up a big week of economic feedback on Friday. Data from China will also be thrown into the mix with the official services PMI and HSBC manufacturing PMI scheduled for release today and the HSBC services PMI on Wednesday’s docket.
Greenback at the mercy of US Jobs, fiscal cliff negotiations
The week ahead is a lively as they come in terms of global market moving themes, and true to form the only assurance is that of volatility. US markets will gear up for the monthly ‘toss of the coin’ with Friday’s non-farm payrolls the highlight, but not before a treasure trove of top tier macro points to get the taste buds ready for the main course. The US economy is expected to have created a net 90,000 new jobs in November, with the official unemployment rate to hold steady at 7.9 percent.
Pre-cursors in the lead-up to the Friday’s jobs print include ADP private sector employment gauge (Wednesday), Challenger Job cuts, and weekly jobless claims (Thursday). Also a valued indicator of the health of US manufacturing and employment sub-component will be Monday’s ISM manufacturing release, which is forecast to edge slightly lower from 51.7 to 51.5 in November, but remain firmly in expansion territory. The University of Michigan consumer confidence data will wrap up a big week of economic data with the preliminary estimate due for December.
Although markets will have a wealth of macro points to guide the way, investors will remain transfixed on a theme far less quantifiable, fiscal cliff negotiations. The clock is ticking; President Obama and Congress now have a little under a month to brush aside their differences and reach a consensus before some $700 billion of austerity measures kick in. Markets remain on high alert to every tidbit of feedback regarding the progression of the fiscal cliff talks. These speculative gyrations guided markets over the course of last week, and we anticipate this will remain a primary market moving theme over the week ahead. President Obama has said a “framework” will be put in place before Christmas, which may keep markets from entering a deep trough, however it’s clear this element of blind faith won’t last for long. There’s a sense negotiations will go down to the wire, in turn we expect investors to err to the side of caution, with the greenback obvious hedge against any perceived lack of progress.