THE BIG PICTURE: Door still open for rate cuts

Each quarter the Reserve Bank releases its quarterly Statement on Monetary Policy. This is the most comprehensive assessment of the Australian economy as well as providing a rundown of international conditions.

But not only is it a backward-looking assessment, but there is also a key forward-looking component. That is, the Reserve Bank provides its forecasts for economic growth and inflation as well as providing its views of upside and downside risks.

In the February statement, the Reserve Bank reduced near-term forecasts for both economic growth and inflation. And in the May statement, the Reserve Bank not only reduced near-term economic growth forecasts but also reduced the forecasts at the bottom of its indicative range for growth through to the end of 2013. At the same time, the RBA trimmed inflation forecasts to the end of 2012.

In the new forecasts to be released next Friday, August 10, the Reserve Bank may actually lift the near-term economic growth estimate but it is likely to retain the medium-term view that economic growth will be around “normal” levels of 3.0-3.25%. Little change is expected in the inflation forecasts with the Reserve Bank projecting that inflation will hold in the 2.0-3.0% target band. In short, the Reserve Bank will leave the door open to further rate cuts over 2012.

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The week ahead

In Australia over the coming week, interest rates and jobs hog the spotlight, although there will be some interest in home loan data and the Reserve Bank’s Statement of Monetary Policy rounds off the week on Friday. In the US, there is a paucity of economic data, so summer holidays and the Olympics will most likely dominate attention. In China the monthly download of economic statistics occurs on Thursday.

In Australia, the week kicks off on Monday with data on job advertisements as well as a monthly indicator of inflationary pressures. In June, job ads fell by 1.2%, confirming that businesses are cautious about taking on new staff. And also in June the monthly inflation gauge published by TD Securities and the Melbourne Institute fell by 0.2%, providing further proof that inflationary pressures remain in check.

On Tuesday, the Reserve Bank meets to decide interest rate settings, but it is clear that there isn’t the same degree of interest in the decision as in recent months. Simply, this is because the Reserve Bank Governor has indicated that he is comfortable with current interest rate settings.

One thing the Reserve Bank board may spend a little more time discussing is the Aussie dollar. Not only has the Aussie crept higher against the US dollar, it has hit record highs against the euro and is back near record highs against the British pound. While consumers love a stronger Aussie, businesses almost uniformly hate it as it makes life tougher, especially in terms of pricing margins and competitiveness.

On Wednesday, data should show that new home loans rose by 3% in June.

On Thursday, the July employment figures are issued. After falling by 27,000 in June, we expect that employment lifted by around 12,000 in July. There may be plenty of news headlines about job losses, but there are also plenty of stories of job hiring that don’t get the same attention. In Western Australia, 5,000 workers are sought for the Wheatstone project. Meanwhile, McDonald’s is looking to hire 3,000 staff. And there are plenty of anecdotes from construction and engineering firms that they can’t hold on to workers given the strong pull of high mining wages.

We expect the unemployment rate to remain at 5.2%. However, the data on hours worked is also worth analysing to get a fuller picture of labour market conditions. Employers have sought to work staff longer hours rather than take on new employees.

On Friday, the Reserve Bank issues its quarterly assessment of economic conditions. There is probably no other document that goes into as much detail on the Australian economy. And in addition the document contains the Reserve Bank’s latest forecasts of economic growth and inflation. We don’t expect much change to the forecasts, with economic growth tipped to show “normal” growth near 3.0-3.25%, with inflation remaining contained.

In the US, economic data is thin on the ground over the coming week with few “top shelf” indicators to garner attention. On Monday, the employment index is issued while, on Tuesday, consumer credit and a weekly indicator of chain store sales are released.

On Wednesday, the weekly mortgage market index is scheduled alongside June quarter estimates of productivity and labour costs. On Thursday, the weekly data on new claims for unemployment insurance is released. And given the lack of market-moving information over the week, this data on jobless claims is probably the highlight of the week. Also on Thursday, international trade figures are released with the deficit tipped to narrow from $US48.7 billion to $US47.5 billion.

Rounding off proceedings on Friday in the US is July data on import and export prices together with July data on the US federal budget.

In China the highlight of the week is the monthly download of key economic data on Thursday including figures on inflation, production, retail sales and investment.

Sharemarket, interest rates, currencies and commodities

The Australian profit reporting season moves into the second week. So far only a spattering of companies have reported, but we crank up a notch in the (shortened) coming week and then move into full flight over the fortnight from August 13-24.

On Tuesday, companies listed to report include Cochlear, Leighton, Reckon and Transurban. On Wednesday, Computershare, Rio Tinto and Stockland are listed. On Thursday, Telstra and Webjet are expected to report and, on Friday, Crown and Domino’s Pizza are listed to report earnings.

Ahead of the Reserve Bank board meeting, financial markets certainly aren’t expecting a rate cut this month. Current pricing suggests that a rate cut is just a 21% chance. But traders and investors haven’t given up hopes of another interest rate reduction with a 25 basis point cut factored in by December.

Consumers have had reason to complain about petrol prices from time to time, but not now. Currently motorists can fill up at a lower petrol price than existed a year ago. Currently the average retail price is 137.7 cents a litre, down 3% on a year ago. Interestingly the price of petrol is actually broadly unchanged with the level five years ago despite the fact that wages have lifted 27% over that period.

Craig James is the chief economist at CommSec.

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