RBA: Shift In Risks Drove Rate Cut Timing
Mar-04 22:59
RBA Deputy Governor Hauser spoke at the AFR Business Summit on uncertainties around global trade and the domestic labour market. He said that while unchanged rates resulted in a “modest undershoot” of the band mid-point over the forecast horizon, the timing of the cut was driven by judgement on the risks which had shifted with greater downside risks to inflation from trade uncertainties but lower upside risks to inflation.
- He said that there has been progress in bringing inflation back to the band but that the RBA can’t declare victory yet. He also identified productivity growth as the key issue which monetary policy can’t do anything about and can only react to. It may be the reason for lower wage growth despite the tight labour market.
- Hauser noted that as Australia increased rates less than others, it will then reduce them by less too. But it began easing at around the same point from target as other countries.
- The RBA is alert to the possibility of labour market overheating but is unclear as to the level of spare capacity, as it is unusual to have strong jobs growth with subdued activity. It may reflect the gap between non-market and market employment gains.
- While Australia has little direct trade exposure to the US compared to most other countries, its growth will be negatively impacted through indirect effects. The RBA is unsure if a trade war has actually begun, but it will monitor the situation closely for what it means for Australia. Its scenario analysis suggests that it will be ambiguous for inflation.
- There are many things that still need to be made clear, including retaliatory measures and the FX response. As a result, a trade scenario wasn’t included in the RBA’s February base case. So far the equity risk premium has been very low but has adjusted recently.
- The uncertainty alone is a problem with the Fed estimating it reduced global growth 1pp in 2019 and Hauser thinks it could be larger this time.
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AUSSIE BONDS: Little Changed, Tariffs On Canada, Mexico & China Confirmed
Feb-02 22:50
ACGBs (YM flat & XM -1.0) are little changed after US tsy yields finished last week modestly higher.
- US tsys extended lows late Friday after White House officials confirmed 25% tariffs on Canada & Mexico, and 10% on China will be announced Saturday, February 1.
- Over the weekend, Canada and Mexico have announced retaliatory tariffs on the US. In addition, China has said it will take counteractive measures and file a lawsuit with the World Trade Organisation.
- Focus turned to this week's heavy corporate earnings docket, key CPI and PPI inflation measures and headline employment data for January.
- Cash ACGBs are slightly mixed with the AU-US 10-year yield differential at -10bps.
- Swap rates are flat to 1bp lower.
- The bills strip is little changed.
- RBA-dated OIS pricing is flat to 2bps softer across meetings today. A 25bp rate cut is more than fully priced for April (137%), with the probability of a February cut at 91% (based on an effective cash rate of 4.34%).
- Today, the local calendar will see Retail Sales, Building Approvals, CoreLogic Home Values, S&P Global PMI Mfg, Melbourne Institute Inflation and ANZ-Indeed Job Advertisements.
- A new 21 March 2036 Treasury Bond is planned to be issued via syndication this week (subject to market conditions).
AUSSIE 3-YEAR TECHS: (H5) Corrective Bounce
Feb-02 22:45
- RES 3: 97.190 - High May 5 2023
- RES 2: 96.730/932 - High Sep 17 / 76.4% of Mar-Nov ‘23 bear leg
- RES 1: 96.260/360 High Jan 29 / High Dec 11
- PRICE: 96.220 @ 16:34 GMT Jan 31
- SUP 1: 95.830 - 1.000 proj of the Dec 11 - 20 - 31 price swing
- SUP 2: 95.760 - Low 14 Nov ‘24
- SUP 3: 95.480 - Low Jan 11 2023 and a major support
A bear cycle in Aussie 3-yr futures remains intact and short-term gains are considered corrective. On the upside, a clear reversal higher would signal scope for an extension towards 96.360, the Dec 11 high. The recent move down reinforces the bear theme and the contract has traded through the December low. A deeper sell-off would refocus attention on 95.760, the 14 Nov ‘24 low.
OIL: Crude Up On Friday, Canadian Oil Faces 10% Tariff
Feb-02 22:42
Oil prices finished Friday higher after a volatile day boosted by confirmation that oil imports into the US would not be exempt from tariffs.
- WTI rose 1.5% to $73.81/bbl, close to the intraday high, but was down 1.1% on the week. The benchmark rose 3.6% in January. It fell to $71.94 earlier in the US session. Initial support is at $72.25, 50-day EMA, while key resistance is at $79.48.
- Brent was 0.8% higher at $76.50/bbl after falling to $75.16 earlier. It finished January up 3%. Key resistance is at $83.28 and initial support at $75.46, 50-day EMA.
- A 10% tariff on US imports of Canadian oil, natural gas and electricity will be imposed, lower than the 25% for other goods. With over half of American crude imports coming from Canada, the move is likely to increase fuel prices. The API has said it will continue to work to have the sector excluded. Mexico is a major importer of US refined products and would also face higher prices.
- Bloomberg reports that almost all of Canada’s 4mbd of oil exports go to the US and around 500kbd from Mexico. President Trump plans to ramp up the US’ own production. Midwestern refineries are dependent on Canadian crude and refining rates may now be reduced.
- The impact on Canadian prices is unclear and will depend on how the tariffs are implemented, the oil sands maintenance season and the degree of diversion through the Trans Mountain pipeline to export to Asia rather than to California.
- Ukraine has been targeting Russian oil infrastructure again with a refinery hit on Friday. The amount of damage remains unclear but the Rosneft PJSC refinery struck around a week ago has stopped production.
- A US envoy met with Venezuela’s President Maduro which resulted in an agreement to release American prisoners and for Venezuela to accept the return of illegal immigrants. The talks open the possibility of a deal on its sanction-hit oil.
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