RBA Meeting Minutes; UK, NZ, Canada and Japan CPIs

We don’t have any central bank meetings scheduled for this week, but we get the minutes from the latest RBA meeting, with investors eager to find out whether the case for a rate cut has increased or not. In the UK, following the EU’s decision to grant the UK another extension, Brexit could take the back seat, especially with UK MPs off for an Easter break. GBP-traders may pay some attention to UK data, with the employment report for February, the CPIs and retail sales, both for March, on this week’s agenda. We get inflation data from New Zealand, Canada and Japan as well, while from China, Q1 GDP is coming out.

Monday is a very light day, with no major economic indicators or events scheduled on the agenda. The only one worth mentioning is the New York Empire State Manufacturing index for April, which is expected to rise to 8.10 from 3.70.

On Tuesday, during the Asian morning, the RBA releases the minutes of its latest policy decision. At that meeting, the Bank kept interest rates unchanged as was broadly anticipated, but the accompanying statement had a softer tone than the previous one, despite the absence of any mention to a possible rate cut. Officials acknowledged the recent softness in economic growth and dropped the view that the central scenario is for the economy to grow by around 3% this year. Most importantly though, they did not repeat that unchanged rates would be consistent with sustainable growth and achieving the inflation target. Instead, they said that they will set future policy in order to reach those goals.

Back then, the message we got was that the current policy stance may not be consistent with sustainable growth and achieving the inflation target, and that a change could be needed in coming months. Judging by the softer language, we noted that the chances for a rate cut may have increased from the previous meeting. However, just last week, RBA Deputy Governor Guy Debelle noted that their expectation is for decent growth in the economy, which may prevent a rate decrease, encouraging investors to push back the timing of such an action. According to the ASX 30-day interbank cash rate futures implied yield curve, the market now expects a cut in October, and not in August as was the case a few days ago. So, having all that in mind, we will scan the minutes to find out whether the likelihood for a cut has not increased as Debelle’s comments suggested, or whether most members have placed more weight to the cut case, in-line with how we interpreted the meeting statement.

During the European day, the UK employment report for February is due to be released. The unemployment rate is forecast to have rebounded back to +4.0% from a 44-year low of 3.9%, while average weekly earnings including bonuses are anticipated to have accelerated to +3.5% yoy from +3.4%. The excluding-bonuses rate is expected to have held steady at +3.4% yoy, the fastest pace since November 2008. According to the IHS Markit/KPMG & REC Report on Jobs for the month, data pointed to a further sharp rise in salaries, but the latest increase was the softest in seven months, while temporary wage inflation eased to a 13-month low. In our view, this tilts the risks surrounding both the wage growth rates to the downside.

From Germany, we get the ZEW survey for April. The current conditions index is anticipated to have declined for the seventh consecutive month, to +6.6 from +11.1, but the expectations index is forecast to have exited the negative territory, after staying there for 12 months. Specifically, it is expected to have risen to +0.9 from -3.6.

In the US, industrial production for March is due to be released. The forecast suggests that IP accelerated somewhat to +0.2% mom from +0.1%, but this is likely to drive the yoy rate lower as the March 2018 print, which will drop out of the yearly calculation, was at +0.7% mom. That said, bearing in mind that the ISM manufacturing PMI for the month rose to 55.3 from 54.2, we view the risks surrounding the IP forecast as tilted to the upside.

On Wednesday, during the early Asian morning, New Zealand’s CPI for Q1 is coming out and expectations are for the yoy rate to have moved further below the midpoint of the RBNZ’s 1–3% target range. Specifically, it is expected to have slid to +1.7% yoy from +1.9%. At its latest meeting, the RBNZ kept interest rates unchanged at +1.75%, but the statement accompanying the decision was even more dovish than previously. Officials changed the part saying that the “next OCR move could be up or down”, noting that “the more likely direction of our next OCR move is down”. According to New Zealand’s OIS (Overnight Index Swaps), there is a nearly 30% probability for a rate cut at the Bank’s upcoming gathering, scheduled for May 8th. Yes, a +1.7% yoy rate would still be above the Bank’s own projection for the quarter, which is at 1.6%, but combining it with the GDP growth rate for Q4, which was below officials’ estimates, it may prompt market participants to increase their bets with regards to a May cut.

From China, we have GDP data for Q1, alongside the fixed asset investment, industrial production and retail sales, all for March. The qoq growth rate is forecast to have ticked down +1.4% from +1.5%, which will drag the yoy rate slightly lower, to +6.3% from +6.4%. That said, fixed asset investment, industrial production and retail sales for March, are all anticipated to have accelerated in yoy terms, entering the basket of data supporting a stabilization in the world’s second largest economy during the last month of the quarter. Thus, a 6.3% yoy growth rate by itself is unlikely to spark fresh fears. Unless of course the actual print comes in below consensus, and/or the other three releases disappoint as well. In case the forecasts are met, we believe that market participants may prefer to pay more attention to data pointing to how the economy has entered the second quarter, in order to better evaluate whether the bad days are behind us or not.

During the European morning, Eurozone’s final CPIs for March and the bloc’s trade balance for February are due to be released. As it is usually the case, the final inflation numbers are expected to confirm their preliminary estimates, while the Euro area trade surplus is anticipated to have rebounded to EUR 12.3bn after falling to just 1.5bn in January.

In the UK, we have the CPIs for March. Both the headline and core rates are anticipated to have ticked up to +2.0% yoy and +1.9% yoy from +1.9% and 1.8% respectively. However, bearing in mind that the yoy change rate of Brent oil has declined somewhat, returning into the negative territory, we believe that if the core rate is poised to tick up, the headline one may stay unchanged. In other words, we see the risks surrounding the headline forecast as tilted somewhat to the downside.

With all eyes turned to the Brexit landscape, the latest BoE policy meeting passed unnoticed. Policymakers kept interest rates unchanged at +0.75%, reiterating that an ongoing tightening at a gradual pace and to a limited extent would be appropriate. According to the minutes, they also maintained the view that whatever form Brexit takes, the policy response will not be automatic and could be in either direction. The UK OIS suggest that there is a decent — compared to other central banks — 23% probability for rates to be higher by the end of the year and under normal circumstances, an uptick in the CPIs would have pushed that number higher.

That said, with the EU granting a second extension to the Article 50, which could last up until October 31st, we prefer to wait for the upcoming BoE gathering to shed some light on the Bank’s future plans. Specifically, we would like to find out whether the Bank’s hands would stay tied up until the Brexit riddle is resolved, or whether officials are thinking to act before that happens, and if so, to which direction. If this delayed uncertainty is expected to leave more marks on the UK economy, it could prompt policymakers to abandon the view that an ongoing tightening remains appropriate.

We get CPI data for March from Canada as well. Expectations are for the headline rate to have risen to +1.8% yoy from +1.5%, while no forecast is available for the core print. Although January’s GDP came in better than expected, the soft employment report for March allowed market participants to keep bets with regards to a rate cut by year-end on the table. According to Canada’s OIS, they assign a 20% chance for that to happen. Remember that at their latest gathering, BoC officials turned dovish and highlighted the uncertainty surrounding the timing of their future actions. So, having all that in mind, accelerating headline inflation, especially if accompanied by a rising core rate, could be pleasing news for BoC policymakers and may reduce the chances for a rate cut.

The US and Canadian trade balances for February are also coming out. The US deficit is forecast to have widened to USD 53.50bn from 51.10bn, while the Canadian one is forecast to have narrowed somewhat.

On Thursday, Asian time, Australia’s employment report for March is coming out. Expectations are for the unemployment rate to have rebounded back to 5.0% from 4.9%, but the net change in employment is anticipated to show that the economy gained more jobs than it did in February. Specifically, it is expected to show that 15.2k jobs were added in March, up from 4.6k the previous month.

During the European morning, we get preliminary manufacturing and services PMI data for April from several European nations and the Eurozone as a whole. The bloc’s manufacturing index is expected to have rebounded to 48.1 after hitting 47.5 in March, while the services print is forecast to have declined to 53.1 from 53.3. This would drive the composite index a tick higher, to 51.7 from 51.6, but it would still be far from suggesting that the Euro area economy has turned the corner.

Last week, Draghi and co. reiterated their guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with the ECB Chief noting again that the risks surrounding the euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”. Thus, although the PMIs would still be far from exciting, they could lessen somewhat the need for additional policy measures beyond the new round of TLTROs, which is expected to begin in September.

We also get retail sales data from the UK, the US and Canada. The UK and US data are for March, while Canada’s release is for February. Getting the ball rolling with the UK prints, both headline and core sales are forecast to have declined -0.3% mom, after rising +0.4% and +0.2% respectively. That said, this would drive both the yoy rates higher, to +4.6% and +4.0% from +4.0% and +3.8% respectively. In the US, both the headline and core rates are forecast to have rebounded to +0.9% mom and +0.7% mom, from -0.2% and -0.4% respectively, while in Canada, the headline rate is expected to have risen to +0.5% mom from -0.3%, and the core one is anticipated to have ticked up to +0.2% mom from +0.1%.

Finally, Friday is Good Friday for most of the G10 nations and thus, their respective markets will be closed. That said, we get a couple of data sets: Japan’s CPIs for March and the US housing starts and building permits for the same month.

With regards to Japan’s inflation, the headline rate is expected to have risen to +0.5% yoy from +0.2%, while the core one is anticipated to have held steady at +0.7% yoy. The case for a rebound in the headline print and stable core rate is supported by the Tokyo CPIs for the month, which moved in a similar fashion. A potential rebound in the headline rate could be somewhat encouraging news for BoJ policymakers, but bearing in mind that all Japan’s inflation metrics remain well below the Bank’s objective of 2%, we stick to our longstanding view that Japanese officials have still a long way to go before they start examining whether they should alter their ultra-loose policy.

Passing the ball to the US, building permits are expected to have increased 0.3% mom, after sliding 2.0% in March, while housing starts are forecast to have rebounded 6.5% mom following an 8.7% mom tumble.

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