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

When is the RBA meeting?

This month’s Reserve Bank of Australia (RBA) meeting will occur on Tuesday 4 June at 2.30PM (AEST).

The economic data that matters

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

Economic outlook

Economic activity in Australia is showing signs of slowing. GDP is below trend, consumption is waning, and the labour market appears to be showing signs of fatigue. The overall concern now is that soft domestic fundamentals, as well greater risks in the global economy, will continue to stifle the Australian growth outlook. Incidentally, local GDP data is released the day following the RBA’s meeting, and will be framed within the outcome of the RBA’s meeting. Judging by the central bank’s recent communicates however, their views on the economy have diminished somewhat, implying that the current growth outlook may well require monetary (and fiscal) support.e an interest rate cut would likely sustain the index’s upside momentum.

Labour market

An increase in the unemployment rate to 5.2 per cent, as well as an increase in the underemployment rate and a contraction in full time jobs, paved the way for potential interest rate cuts from the RBA at this Tuesday’s meeting. Fundamentally, it appears that the RBA’s current policy settings, by the central bank’s own admission, may not be sufficient in driving further employment growth, and by extension, the necessary lift in wage growth to spur moderate inflation. A careful eye will be cast towards the RBA’s commentary about the labour market, and whether current economic conditions are sufficient to see it 'tighten'.

Property market

Some hope is emerging amongst that the downturn in the Australian property market may be slowing. A part of this is cyclical in nature, but the recent announcement from APRA to ease lending standards has stoked optimism for a rebound in the market. The re-election of the Coalition government has also been a net-benefit for property, given their promises to forego the negative-gearing and capital-gains-tax reforms floated by the Labour opposition. Interest now will be in what the RBA thinks about the impact of these developments; and whether cutting interest rates will stoke property prices, or exacerbate already high levels of private debt.

What is the market expecting at this RBA meeting?

Financial markets are overwhelmingly preparing for an interest rate cut from the RBA. Following the slew of soft domestic economic data, as well as the recent dovish turn in the RBA’s communications to the market, traders have priced in just shy of a 97 per cent chance of a cut on Tuesday afternoon. And it won’t stop there, if market pricing and the general economic commentary is a guide: interest rates are implying another 38 basis points of cuts from the RBA before year end, while several high-profile economists have suggested rates will be slashed to as low as 0.5 per cent by next year.

How could the RBA meeting impact the financial markets?

Interest rates

Firstly, the big variable for interest rate markets will be whether the RBA cuts rates, or not. The most extreme moves in fixed income markets would naturally occur should the RBA defy expectations and leave rates on hold, even if only for one more month. The consequence would be a big lift in money market rates, as well as Australian Government Bond yields. If on the other hand the RBA falls in line with expectations, the focus will turn to the meeting’s accompanying statement, for some indication as to what the RBA considers the appropriate impetus and timing to move ahead with rate cuts.

Australian dollar

The event-risks for the Australian dollar coming into the RBA meeting is highly asymmetrical. Because such a high probability for an interest rate cut is baked into the market, the likely scale of the upside move in the AUD/USD in the event that the RBA don’t cut rates is far greater than the likely scale of the downside move in that pair if the RBA do cut rates. The potential for rapid downside in the AUD/USD rests in how the RBA’s accompanying statement is judged. That is: how many cuts are there to come, in the context of what is already priced-in.

ASX200

The fall in interest rate expectations, and the subsequent swoon Australian Government Bond yields, has been highly favourable for the ASX. Firstly, the slightly weaker Australian Dollar this dynamic has enabled has supported export driven stocks. Secondly, the drop-in yields has boosted the relative attractiveness of equities as an asset class, especially when it comes to income generating stocks. Because of the tangible impact of lower interest expectations on the market, the ASX200 would be liable to a short-term tumble should the RBA keep interest rates on hold, while an interest rate cut would likely sustain the index’s upside momentum.