Market calls: no cuts, no glory

For its part, the Reserve Bank of Australia continues to hope for further currency weakness to stimulate economic activity. While market pricing suggests a heightened possibility of a rate cut, in ANZ’s view the probability remains below 50 per cent. 

Looking closer at the figures, a sharper-than-expected fall in business investment, a large fall in the terms of trade and only modest growth in household consumption saw real GDP increase just 0.3 per cent in Q3. Income measures of GDP were weaker still. 

The figures mean real gross domestic income (which adjusts real GDP for the terms of trade) has declined for two consecutive quarters. It is important to note while the areas of weakness were largely as expected, the magnitude of the declines were larger. 

Falling business investment has been foreshadowed for a long time as resource investment winds back from historically high levels. Meanwhile, declining spot commodity prices had signalled a decline in the terms of trade, corporate profitability and government expenditure. 

Household consumption again slowed. Soft growth in household income is keeping a lid on consumer spending, although households are now saving a little less. 

As a result of all this, short-end market pricing has shifted, heightening the possibility of further rate cuts. ANZ accepts policy easing is possible in the first half of next year, but maintains the probability is less than half and a long period of unchanged monetary policy remains the most likely outcome. 

The steady cash rate expectation is predicated on core global forecasts including a slow cyclical recovery in the global economy led by the US. ANZ expects growth rates and the housing market in China to stabilise and commodity prices to steady. 

Looking ahead, upcoming labour market and business data will again be critical to the outlook, while the evolution of the US recovery will be a key factor in RBA deliberations. 

US employment in November was very strong. Accelerating wage inflation will leave the US Federal Reserve confident inflation is trending closer to their target. This fits with ANZ’s view that US interest rates will begin rising early next year. 

If wages and inflation in the US take longer to pick up it could have a material influence on the trajectory of US monetary policy and the $A/$US exchange rate. In turn, this would affect the path for interest rates in Australia. 

For its part, the Australian is doing little to add stimulus to the economy and further downside is still likely. That said, in the near term, with the market now pricing a better-than-even chance the RBA will cut by March, for the Australian dollar to move markedly lower there would need to be more aggressive policy tightening from the Fed priced into the $US.