By: Editorial Team, StoneX Media
The Reserve Bank of Australia's updated forecasts read as dovish on the surface, with a softer near term inflation profile and a higher unemployment path across the horizon. Before its next policy meeting, though, Australian markets get a wages report, two labor force reports, a monthly consumer price index print, quarterly gross domestic product and a household spending indicator, any of which can run hot. The reaction function implied by those forecasts has shifted, because a lower inflation profile means a smaller surprise is enough to breach it while extra labor market weakness is already assumed. That matters most at the front end of the Australian curve, where another hike is barely priced for the coming meeting.
David Scutt, Senior Market Analyst for Global Macro at StoneX Media, is based in Australia and covers Australian rates alongside foreign exchange, commodities and equity indices, which is the ground where a crowded domestic data calendar meets front end pricing.
"It's already shown this year that when its patience with inflation runs out, it can move quickly", Scutt says of the Reserve Bank of Australia. The releases stacked ahead of the next meeting are a wages report, two labor force reports, a monthly consumer price index print and quarterly gross domestic product, and each one now lands against a lower hurdle for an upside inflation surprise. Scutt also points to household spending, which "matters too, particularly given the RBA's concern about capacity pressures". For anyone watching Australian front end pricing, the practical consequence is that no single release has to be dramatic, since the sheer number of prints raises the chance one of them runs hot.
Firmer energy prices and the return of the full fuel excise are plausible sources of near term upside inflation risk in Australia, which is what makes the run of releases before the next Reserve Bank of Australia meeting more than a formality. According to Scutt, "If we see some heat in these upcoming releases, the repricing could be pretty sharp at the front end of the curve", a risk that stems from pricing which currently treats a hike at the coming meeting as remote. The timing compounds it, he adds, since "The August household spending indicator even lands on the day of the bank's September meeting". Anyone carrying Australian front end rate exposure is therefore positioned into a calendar where the final data point arrives on decision day itself.
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--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: David Scutt, Senior Market Analyst, Global Macro, StoneX Media
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Market commentary Interest Rates- Thought Leadership The Reserve Bank of Australia's updated forecasts lowered the bar for an upside inflation surprise while building more labor market weakness into the baseline. With wages, jobs, inflation, growth and spending data all landing before the next policy meeting, the risk sits with front end pricing that still treats a hike as remote.
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