Australia: Reserve Bank in focus following the Federal Election

In the coming week, Reserve Bank events dominate following the Federal election. Governor Philip Lowe’s speech in Brisbane on Tuesday will hog the headlines immediately after the minutes of the May 7 Board meeting are issued. On the data front, the Bureau of Statistics (ABS) provides an update on construction work done.

The week kicks off on Tuesday when the Commonwealth Bank Business Sales Index for April is released together with the weekly Roy Morgan-ANZ measure of consumer sentiment.

Also on Tuesday, the Reserve Bank will release minutes of the May 7 monetary policy meeting, where interest rates were left unchanged. The commentary will be closely observed by investors and economists for clues on the future path of interest rate settings. In particular, the potential insertion of an explicit cash rate easing bias will be of keen interest.

That said, the quarterly Statement of Monetary Policy was released on May 10, which largely supersedes the commentary from the May 7 Board meeting. In the Statement, the Reserve Bank acknowledged that “growth in the Australian economy has slowed and inflation remains low.” But the Reserve Bank reiterated that it will remain patient and see whether strong jobs growth continues as “the labour market is performing reasonably well, with the unemployment rate steady.”

In an interesting development, the Reserve Bank downgraded its economic growth and inflation forecasts last week noting that “the domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate.” While the RBA always notes that forecasts are based on technical assumptions, this time it is quite explicit with the rate cut assumptions.

And Reserve Bank Governor Philip Lowe speaks at the Economic Society of Australia in Brisbane on Tuesday. The speech occurs after the release of the Board’s minutes. As usual, the commentary will be heavily scrutinised, especially as it will be Dr. Lowe’s first speech since March 6. While the Board’s focus remains on key developments in the labour market, the deteriorating global trade backdrop could also potentially trigger an eventual rate cut should growth slow.

• On Wednesday the ABS provides an update on construction activity. Construction work done fell by 3.1 per cent in real (inflation-adjusted) terms in the December quarter. A decline of 1 per cent is forecast in the March quarter.

• Also on Wednesday the Department of Jobs and Small Business releases the Internet Vacancy Index (IVI). The IVI fell by 1.5 per cent to 83.1 points in March – the biggest fall in six years.

• On Thursday the Commonwealth Bank and Markit release the preliminary May services and manufacturing purchasing manager indexes (PMI). Both indexes are expanding, but activity remains subdued.

Overseas: US Federal Reserve and European elections in the spotlight

• US-China trade tensions have ratcheted up a notch, overshadowing central bank commentary in recent sharemarket trading sessions. But US Federal Reserve Chair Jerome Powell’s speech and the release of the Federal Open Market Committee (‘FOMC’) April 30-May 1 meeting minutes will be of major interest to investors.

• The week begins on Monday in the US when the Chicago Federal Reserve National Activity Index is released.

• Also on Monday, US Federal Reserve Chair Jerome Powell gives the keynote speech at the Atlanta Federal Reserve Financial Markets Conference in Florida.

• On Tuesday, data on existing home sales are released with the regular weekly reading on chain store sales.

• On Wednesday, the weekly mortgage applications data is released by the Mortgage Bankers Association.

• Also on Wednesday, the US FOMC issues the minutes of the April 30-May 1 policy meeting. The FOMC retained its federal funds rate target at 2.25-2.50 per cent. And policymakers are forecasting no interest rate changes in 2019, despite acknowledging that inflation has declined “below 2 per cent” (its target). Chair Jerome Powell said that low inflation was “transitory”, the neutral policy stance is “appropriate right now” and “we don’t see a strong case for moving in either direction.”

• The minutes, however, pre-date the escalation in the US-China trade war. Should the tariff stand-off continue, potentially spilling over into weaker US economic data and financial market volatility, then traders may reinstate futures market pricing for US rate cuts.

• On Thursday in the US data on new home sales is issued with the influential Kansas City Federal Reserve manufacturing index and weekly figures on new claims for unemployment insurance. Single family home sales rose by 4.5 per cent in March to a 16-month high of 692,000 annualised pace due to lower mortgage rates and rising wages. But economists tip a 3.8 per cent fall in sales in April.

• Also on Thursday, Markit releases its ‘flash’ manufacturing purchasing manager indexes across developed economies.

• And the European parliamentary elections kick-off on Thursday with the potential to undermine economic policymaking should anti-establishment parties gain a foothold across the continent.

• On Friday in the US, durable goods orders (i.e. broadly long-lasting goods) are issued. Orders rose by the quickest rate in seven months in March, led higher by aircraft and motor vehicles. Orders are tipped to fall 1.5 per cent in April.

Published by Ryan Felsman, Senior Economist, CommSec