Australia Defies Hawkish Talk as Lowe Frets Over Household Debt
This article by Michael Heath for Bloomberg may be of interest to subscribers. Here is a section:
Lowe again pointed to the mixed nature of the nation’s labor market -- a key indicator. While the last three monthly reports have shown strong hiring gains and unemployment has dropped to 5.5 percent from 5.9 percent, under-employment remains high. There’s still plenty of slack in the labor market and this is the epicenter of any turnaround on wages -- which are increasing at the slowest pace on record.
The central bank said wage growth is likely to remain low for a while yet. Core inflation remains below the central bank’s 2 percent to 3 percent target and is only forecast to “increase gradually” as the economy strengthens. As an aside, the RBA dropped its reference to an economic growth forecast of 3 percent and said the recent slowing in gross domestic product partly reflected temporary factors, like weather, but not all of it.
“The RBA has explicitly chosen not to adopt a more hawkish tone,” said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. “Ultimately, a more hawkish central bank requires the distribution of risks around both growth and inflation to have improved, such that the current setting of financial conditions is no longer appropriate. Our sense is that this is not yet the case in Australia.”
The Australian Dollar has been ranging mostly below 77¢ since early 2016 and pulled back against today to confirm near-term resistance at that level. Household debt is more than a minor issue for the RBA and with commodity prices still relatively low they are going to be cautious about raising interest rates in a country where floating rate mortgages predominate.
The weakness of the Australian Dollar is a bonus for commodity producers who price their products in US Dollars not least as economic growth picks up globally. The S&P/ASX 300 Resources Index firmed today from the region of the trend mean with industrial resources producers leading while gold miners pulled back. The Index has a similar pattern to the London Metals Index and the FTSE350 Mining Index. A sustained move below the recent lows would be required to check potential for some additional upside.
With the banks also bouncing the S&P/ASX 200 Index continues to firm from the region of the trend mean and a sustained move below it would be required to question medium-term scope for additional upside.
