RBA Preview: what to expect from this week’s RBA meeting

When is the RBA meeting?

This month’s RBA meeting will occur on Tuesday, July the 2nd at 2.30PM (AEST).

The economic data that matters:

What are the key themes to watch out of this RBA meeting?

1. “Spare capacity”

Assuming its truly the full story, the need for lower interest rates in the Australian economy comes because of stubborn “spare capacity” in the labour market. Fundamentals are solid, the market has been told. However, looser monetary policy conditions will support further gains in the jobs market, and lead to the necessary wage growth, consumption growth and price inflation the economy requires. The core of this RBA meeting, therefore, will be building out the RBA’s narrative as it relates to “spare capacity” in the labour markets, and how aggressive the central bank may eventually be to ensure this “spare capacity is absorbed.

2. Global risks

Central bankers globally over have all seemingly been singing from the same hymn sheet: domestic fundamentals are strong, but the risk of a global economic slow-down is high, and therefore potential rate cuts may be required to support growth-conditions. Everyone is seemingly pointing at everyone else as being the cause of the problem; while assuring that everything on the home-front is fine. The RBA has adopted this rhetoric in some of their recent communications to the market, and may well adopt it again at this meeting. Traders will be breaking down the language to gauge how impactful the global economic slow down will be on Australia’s economy.

3. How long can they go?

Interest rates will progressively fall for the Australian economy. So much has been stated by the RBA, with the central bank communicating in the minutes of its last meeting “it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead”. But there is a caveat to this notion. Though cuts are coming, the RBA has also implored recently that cutting interest rates alone won’t be sufficient to stimulate the economy, suggesting fiscal support is also necessary to support economic activity. How low can and should go rates go to ensure the RBA reaches its objectives?

What is the market expecting at this RBA meeting?

Markets are overwhelming prepared for another interest rate cut from the RBA this month. As it presently stands, interest rate markets are implying a 75 per cent chance of a cut – with another 30 basis points of cuts implied in the market before the end of 2019. The RBA has stated they are modelling their base-case projections on a cash-rate of 1.00 per cent – meaning a cut tomorrow takes the economy to that position. Markets will be watching for any signs (as they have been all year) that the RBA are being too optimistic in their assumptions, and may be lowering their outlook once again.

How could the RBA meeting impact the financial markets?

1. Interest rates

Money market and bond market rates are trending lower, and with considerable momentum. The dynamic has brought-about the achievement of some ignominious milestones: the yield on 10 Year AGBs have hit new all-time lows, and is trading only just above the current cash rate; while the interest rate sensitive 3 Year AGBs has dipped below 0.90%. Australian sovereign bonds are clearly heavily bid, as traders bet-big that the cash rate will be 0.75% by year-end. Market participants will therefore be perusing the RBA’s accompanying statement around this meeting to confirm or invalidate this bias – f and adjust their price expectations accordingly.

2. Australian Dollar

Because of the skew towards a rate cut in market-pricing, the greatest moves and volatility in the Australian Dollar will come if the RBA foregoes cutting interest rates. This is an unlikely move, but it’s almost the only one that should inspire major price action in the AUD/USD. In the more likely event the RBA does cut rates, the next question becomes: when will the next interest rate move occur from here? The markets are betting heavily right now that the RBA will be lowering rates for some-time, so most of the dovishness from the RBA, and bearishness for the AUD, may well be baked-in.

3. ASX200

June’s interest rate cut sparked a small rally in the Australian equities. Since that 4^th of June meeting, the ASX200 has managed to climb around 5 per cent, supported by greater trade-war optimism, as well as flagged monetary stimulus from other global central banks. A dovish RBA will likely continue to support the ASX, which despite looking overstretched by some valuation measures, ought to prosper as a capital chasers yield in riskier asset-classes. In the shorter-term: intraday price action for the ASX200 will be sensitive to any forward guidance delivered by the RBA, as the market works to decipher the exact timing of rate cuts.