In early February, while commenting in a Q&A session following a speech in Sydney, RBA Governor Philip Lowe blindsided markets with a dovish pivot.
“Through much of last year, it looked more likely to me that the next move in interest rates would be up than down [but] I think things today are much more evenly balanced”, he said, adding that “whether they’re exactly evenly balanced, I’m not sure, our crystal ball isn’t clear enough.”
That was a big deal at the time, coming as it did on the heels of the Fed’s dovish pivot in January.
Lowe’s explicit nod to the notion that RBA policy was, from that point forward, neutral, probably wasn’t a big shock to those who follow the local economy, but it was pretty notable considering it came just a day after a policy statement.
As we wrote at the time, that “put the RBA in sync with other major central banks in terms of not only acknowledging downside risks but also shifting to a neutral stance in the face of what certainly appears to be a more challenging macro backdrop.”
Fast forward two months and the market got a tweak to the statement which, at least for Westpac’s Bill Evans, signaled the bank is now “more ‘live’ than it’s been since Governor Lowe was appointed.” The Aussie fell and those expecting rate cuts saw their conviction hardened.
Well, on Wednesday, a sharp slowdown in inflation further stoked rate cut speculation and to be sure, this was no trivial matter during an otherwise lackluster Asian session.
Headline inflation was flat (i.e., 0.0% q/q) in the first quarter, missing estimates of a 0.2% rise, while trimmed mean inflation rose just 0.3% q/q against a projected 0.4% uptick.
That precipitated some pretty large moves. Overnight-index swaps tipped a nearly 90% chance of two rate cuts this year, up from 62% yesterday. The Aussie tumbled below the opening levels of 2019, diving more than 1% as specs added shorts following the inflation data.
“For an inflation fighting central bank, there should now be little resistance to further policy stimulus in the near term”, Citi wrote, in the course of changing their forecast to reflect a 25bps cut from the RBA in May followed by another cut “as early as June.”
Three-year yields in Australia plummeted some 14bps to a record low.
JPMorgan thinks the data will clear things up for the RBA which, previously, was beguiled by conflicting signals from the economy. “We have been expecting the RBA to cut 25bp in both July and August [but] we are moving those forward to May and June, with risks of more to come, given that now a further loss of inflation momentum has been added to existing concerns about the activity side, making the road back to the inflation target look even longer”, the bank wrote Wednesday.
“While we think the inflation data is unlikely to make a dent on RBA’s thinking, the declines registered in non-tradables inflation are likely to be a cause of worry”, Barclays mused, noting that “a strong labour market, weak GDP growth, high trade surpluses and low household spending” present the central bank with “a kaleidoscope of data which appears to be moving in different directions, sending confusing signals.” Given that, the RBA “has no choice but to stick to its creeping dovish bias”, Barclays says.
Australian stocks, meanwhile, loved it, jumping 1% to an 11-year high. The S&P/ASX 200 is coming off its best quarter since 2009 and its best first quarter in history.
Bad news is indeed good news for domestic equities.
And so, the die is cast. RBA rate cuts are coming, something we already knew but which is now all but certain and will, generally speaking, serve to further cement the global dovish pivot from policymakers.
Concerns about the domestic economy aside, it’s notable that any cuts will presumably coincide with a further rebound in China’s economy, which should ostensibly be helpful for Australia. At this point, though, policymakers aren’t inclined to take any chances.