Watch for global data points critical in determining how aggressive the major central banks need to be to contain inflation as well as potentially flag any recession risks.
Key Takeaways
- Reserve Bank of Australia’s (RBA) policy rate decision on Tuesday
- Reserve Bank of New Zealand (RBNZ) meets on Wednesday to consider its policy rate
- In the US, non-farm payrolls report is scheduled for release on Friday
The primary focus for domestic markets this week will be on the Reserve Bank of Australia’s (RBA) policy rate decision on Tuesday. Across the pond the Reserve Bank of New Zealand (RBNZ) meets on Wednesday to consider its policy rate.
Offshore markets will retain a keen eye on the policy travails of the UK after the Bank of England’s (BoE) surprising intervention in the UK Gilt market on Wednesday.
The BoE’s decision to intervene in bond markets is not sustainable. The measure was enacted for “financial stability” purposes associated with liability driven investment (LDI) pension fund schemes. However, any sustained bond buying is not an option and will only fuel an inflation conflagration. At face value, the BoE intervention is an easing of monetary policy that follows on a substantial easing of fiscal policy which will simply fuel inflation at a time when it has already reached a 40 year high.
The benign outcome is one where the turmoil in markets subsides in the face of the temporary BoE intervention. That is not implausible but appears unlikely. The UK and the BoE face daunting and deeply rooted fundamental economic challenges.
Offshore markets will also focus on key labour market data in the US, particularly the non-farm payrolls report on Friday as well as high-frequency manufacturing and service industry Purchasing Manager Index (PMI) survey data.
Markets will also digest provisional Eurozone September inflation numbers released on the last day of September.
“It might be that too soon a reduction in the policy rate increment also runs the risk of letting the inflation genie run amok.”
– Stephen Miller, investment strategist at GSFM
These global data points are critical in determining how aggressive the major central banks need to be to contain inflation as well as potentially flag any recession risks. At this stage it is hard not to see a continuation of the recent volatility in markets and the trend towards a higher US dollar (USD).
The minutes from the RBA September Board meeting indicated that the Board considered a downshift to a 25 basis point increment.
The RBA Board wishes to give itself maximum optionality. Hence the maintenance of carefully worded counsel that it was “not on a pre-set path” when it came to future policy rate increments.
Some commentators have warned that given the lags in monetary policy there is a risk that the RBA may overdo it and plunge the economy into recession. However, while housing is retreating from the frenetic price and activity action that followed on from massive (and excessive) monetary stimulus through to the end of 2021, the labour market and the consumer (judging from last Wednesday’s August retail sales release) have been reasonably resilient.
Still, it must be acknowledged that recession is a risk.
But so is a premature declaration of victory over the inflation threat.
It might be that too soon a reduction in the policy rate increment also runs the risk of letting the inflation genie run amok.
On that front, high frequency price and wage data continues to exhibit extraordinary momentum.
That what the Governor has described as the “scourge” of inflation is a clear and present danger.
The most recent NAB Monthly Business Survey for August continued to exhibit troubling inflation portents for the September quarter and beyond.
Such momentum indicates a danger of the emergence of the sort of inflation inertia that was last experienced on a global scale in the late 1970s / early 1980s.
Moreover, it is suggestive of some upside risk to the most recent RBA trimmed-mean inflation forecast, issued just over a month ago, of a 6 per cent increase over the year to the December quarter 2022.
In this context, prudence dictates that a further 50 basis point increment is the more appropriate course.
Stephen Miller is an investment strategist at GSFM.