RBA rate hikes in view, tail risks a distraction - AmpGFX

Greg Gibbs, Analyst at Amplifying Global FX Capital, explains that the market is still being distracted by the tail risks related to housing and China, doubting that the RBA will raise rates in near-future.

Key Quotes

“Australian Employment growth has surged in the last three months to the fastest rate since 2004, and the unemployment rate has fallen to recent lows.  Forward-looking employment indicators have accelerated in recent months, and the labour report on Thursday may again beat albeit somewhat elevated expectations.  The market is still being distracted by the tail risks related to housing and China, doubting that the RBA will raise rates, but the reality is that housing prices and sales activity have reaccelerated, macroprudential measures have had a modest dampening impact, and Chinese activity and iron ore prices have also strengthened in recent months. Consumer spending has also recovered in April and May from a weak Q1 and may be supported by stronger employment growth.”

“The RBA minutes note the upswing in government infrastructure that has begun and the positive spillover to the private sector.  Wage price indicators may have bottomed and the surge in electricity prices will filter through to higher inflation outcomes this year; perhaps as soon as the Q2 report due next week. Slack remains in the labour market, and inflation remains below its target range.  However, the RBA’s own research suggests rates are very accommodative; 200bp below neutral, and it appears that significant progress is now being made towards returning to balanced growth and higher inflation. The RBA minutes further noted the improved outlook in the global economy.”

“Currency strength may again delay an RBA hike, but the balance of risks suggest that a hike within the next few months is by no means out of the question, and hike before year end or early next year seems likely.”