RBA Governor Bullock: It's Premature to Be Thinking About Rate Cuts

Remarks of Officials

Central Bank

Summary:

There has been further progress on inflation, but it has been very slow, said RBA Governor Bullock on August 16. The Board remains vigilant to upside risks to inflation. It is premature to be thinking about rate cuts.

Michele Bullock, Governor of the Reserve Bank of Australia (RBA), delivered an opening statement to the House of Representatives Standing Committee on Economics on Friday, August 16, and the main points are as follows:

There has been further progress on inflation, but it has been very slow. Inflation has only declined a further 0.3 percentage points to 3.8 percent in the June quarter of 2024 since the end of 2023. While goods price inflation has declined substantially, it has not been enough to offset continued high services price inflation. The main contributors to this are high rents and insurance prices, in addition to continued demand and the ability for some businesses to pass through costs.

The economic outlook remains highly uncertain. The gap between aggregate demand and supply in the economy is larger than previously thought. While inflation has fallen substantially since its peak, it is still some way above the midpoint of the 2–3 percent target range. Our current forecasts have underlying inflation by the end of this year still sitting around 3.5 percent. The central forecasts are for inflation to return to the 2-3% target range late in 2025 and approach the midpoint of the target band in 2026.

Inflation is proving persistent. The Board remains vigilant to upside risks to inflation and policy will need to remain sufficiently restrictive until it is confident that inflation is moving sustainably towards the target range. It is premature to be thinking about rate cuts.

RBA Governor Bullock's Speech

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Warren Takunda

Economic

Malaysia's economy in the April-June quarter grew 5.9% from a year earlier, accelerating from a 4.2% expansion during the previous three months, according to central bank data released on Friday.

The latest gross domestic product figure represents the strongest growth since the fourth quarter of 2022. It is almost in line with the 5.8% projected by 20 economists in a poll that Reuters conducted from Aug. 7 to Tuesday.

Bank Negara Malaysia, the country's central bank, said Friday that private consumption remained robust in the second quarter, supported by strong private and public sector investments.

"Overall, the economy is expected to expand closer to the upper end of the 4% to 5% range [this year]. But of course, it remains subject to the risk of global escalation of geopolitical conflicts and low expected commodity production," Gov. Abdul Rasheed Ghaffour said during a news conference.

He added that the economy is also benefiting from greater spillovers from the global technology up cycle and more robust tourism activity, in addition to the faster implementation of existing and new investment projects.

Malaysia GDP Growth Accelerates to 5.9% in Q2_1

Exports expanded 8.4% in the April-June period after growing 5.2% the previous quarter as Malaysia continued to benefit from global companies' supply chain shifting.

Private consumption increased 6.0%, up from 4.7% the previous quarter. "The higher private consumption was supported by positive labor market conditions and larger policy support," the governor said.

By industry, the manufacturing sector grew at a 4.7% pace up from 1.9% the previous quarter.

The services sector expanded 5.9%, up from 4.8% the previous quarter.

Growth on the farm came in at 7.2%, up from 1.7% the previous quarter, driven by the oil palm industry.

On the other hand, mining and quarrying slowed to 2.7% from 5.7%, due to weaker natural gas production.

The central bank has projected that tourism receipts will reach 22.4 billion ringgit ($5 billion) this year, up from 21.4 billion ringgit in 2023. Tourist arrivals are expected to be higher than pre-pandemic levels at about 27.3 million, driven by increased flight capacities and higher numbers of Indians and Chinese, who are now given visa exemptions.

The ringgit strengthened against the greenback in the first half of the year, hitting a 16-month high and showing positive prospects for economic growth. The central bank reported that the Malaysian currency appreciated by 3.8% against the U.S. dollar year-to-date.

However, while the currency's recent strength signals recovery, the central bank notes that the ringgit remains exposed to shocks and geopolitical tensions that could take it on a bumpy, volatile ride.

Elsewhere in Southeast Asia, Vietnam reported 6.93% second quarter growth, while the Philippines' GDP expanded by 6.3%.

Source: NikkeiAsia

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JPMorgan

Economic

Political

Elections can be nerve-wracking times for investors. Just as Americans were getting used to the idea of a second Biden or Trump term, the momentum shifted and President Joe Biden withdrew from the race – endorsing Vice President Kamala Harris instead. With such a big election right around the corner, and a whole new candidate to consider, investors may be concerned about how the outcome will impact their holdings.

To address these uncertainties, J.P. Morgan Wealth Management held a webcast about the potential investment implications of the election. Moderator Elyse Ausenbaugh, Head of Investment Strategy at J.P. Morgan Wealth Management, spoke with Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management.

The topics they covered included historical market behavior during elections, as well as what we know about current polling, the presidential candidates and how they’ve impacted markets before. Here are some key insights from the webcast into how your investments may be affected by the 2024 election.

What history tells us about the market during election years

While election years can feel like a rollercoaster of bold news headlines and market dips and spikes, Kelly assured investors that they don’t usually have a lasting impact on investments.

“Generally, we have actually not seen very different behavior or statistically significantly different behavior in election years from other years,” Kelly said. “Of course if you think about it, in recent history there have been some extraordinary election years.”

Kelly pointed to 2020 and the COVID-19 pandemic, 2008 and the Great Recession and 2000 when the tech bubble burst.

“All of those things affected markets generally,” he continued. “But the one thing that I would say happens is after the election, markets have a tendency to go up a bit. The reason for that is because on Election Day uncertainty unfolds, the election occurs, now you know what the result is. The stock market hates uncertainty. When that falls, you often have a rally for the rest of the year.”

Current polling and what that means

The nation is focused on the Harris vs. Trump race, but the election will also determine where Democrats and Republicans stand in the House and Senate.

“Control of the White House will matter for policy, but you can argue that control of Congress matters just as much,” Ausenbaugh said.

Kelly agreed. “The race is very close, and we've only got a bit of recent polling since these events transpired,” he shared, referring to Trump’s assassination attempt and Biden’s withdrawal. “On the Senate side it looks like the Republicans have a slight edge. [With] the House it may be the Democrats [with the] edge on a close election…What I would say the most likely outcome is you don't get all three going to one party, so you have divided government.”

Though he predicted a divided government, in Kelly’s estimation there’s still about a 10% chance of a landslide Democrat or Republican sweep.

Trump vs. Harris on taxes, federal debt and interest rates

Kelly also broke down each administration’s stance on taxes.

Trump win:

The Tax Cuts and Jobs Act of 2017 is likely to be extended beyond the end of 2025.

Harris win:

Some of the tax cuts and breaks may be extended, but the top tax rate on high-income earners may go up. Estate taxes may also increase to previous levels.

Ausenbaugh added that the corporate tax rate will stay where it is, whether the Tax Cuts and Jobs Act is extended or not.

With either administration, Kelly expects the federal debt to continue to rise, which is a problem.

“I don't think [the federal debt is] going to cause a short-term crisis but it limits the long-term interest rates coming down,” he explained. “Either way we are looking at $2 trillion deficits as far as the eye can see. If the Treasury department has to borrow an extra $2 trillion every year, it will have to pay in terms of interest rates.”

Investors: Don’t make blanket assumptions based on the election

One thing investors should steer clear of is expecting certain sectors to perform well – or poorly – based upon who’s in office. According to Ausenbaugh, “Even as the politicians go and campaign on certain policy platforms, we should be very careful as investors about over-indexing any assumption how that may play out in markets.”

An example of this is green energy. One may assume that this sector would perform well under a Democratic administration and take a dip under a Republican one. But that hasn’t been the case in the last few terms.

“If you look at the energy sector, during the last Trump administration, green energy companies did extremely well and fossil fuel companies lagged,” said Kelly, “and during the Biden administration fossil fuel companies have done very well and green energy companies lagged. Which is exactly opposite of what you would expect.”

The bottom line

Democrats and Republicans have different approaches to taxes, trade and other key policy decisions, and which way the election goes is likely to have some impact on your finances. However, what’s unlikely is that short-term market changes due to the election will have long-term ramifications for investments.

It’s also important to remember that no investor can tell the future. Even if one candidate may seem better than the other, as far as markets go, things could quickly change due to unforeseen circumstances during their time in office.

“You don't want to make huge bets based on politics,” Kelly advised. “First, you don't know how the political race is going to transpire. Second, even if you thought you had the policies down, remember what really defines a presidency and a period is not the policies that a party proposes before they go into the White House or Congress; it's what happens then, the events that occur like the pandemic or the Great Financial Crisis or 9/11, which really change how an administration and political system have to react. We don't think we should make big bets based on political outcomes.”

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Devin

Economic

Central Bank

Forex

If Japan's government is thinking ahead, it may be planning to rein in its errant yen rather than propping it up.

A two year cat-and-mouse game between speculators and Japan's authorities - involving mounting bets against the yen on yawning interest rate gaps with other G7 economies - ended this month with the cat licking its lips, even while suffering some indigestion.

The yen's slide to near four-decade lows, which played no small part in the exit of another Japanese prime minister this week, drew months of government warnings and then eventually periodic bouts of yen-buying intervention by the Bank of Japan.

But when the BOJ finally lifted interest rates again on July 31 and warned of more to come, it popped the "carry-trade" bubble and the currency turned violently - sparking an eye-watering but brief spasm of stock market volatility in Tokyo and around the world.

Job done?

There's a body of opinion that thinks it may end up working a little too well. Next Bank of Japan Intervention May Be to Sell Yen_1

Harking back to long stretches of recent history in which the BOJ was either buying or selling yen every two to three years to corral its moves, there's every chance the currency quickly overshoots again on the strong side.

No less than Nomura, Japan's biggest brokerage, raised the very prospect before last week's blowup.

"We may need to start considering potential FX interventions by the MOF (Ministry of Finance) to limit the yen strength rather than weakness," its macro research team told clients on Aug. 2, adding that wasn't yet its "base case."

"Intervention history tells us that after the yen buying interventions, there followed yen selling interventions to limit the yen strengthening too much." Next Bank of Japan Intervention May Be to Sell Yen_2

Next Bank of Japan Intervention May Be to Sell Yen_2

Tendency To Overshoot

And until about 10 years ago at least, that was indeed the routine pendulum swing.

The most celebrated currency intervention episodes were the collective G5 and G7 forays in 1985 and 1987 - with the former Plaza Accord to weaken the dollar followed two years later by the Louvre Accord to shore up the greenback. Dollar/yen was at the heart of those swings.

But yen-specific interventions by Japanese authorities alternately saw official buying and selling of yen at extremes between 150 and 75 per dollar every few years for the two decades after the property bust of the 1990s.

The extremes of Japan's low interest rates since that crash and the resulting inflation and deflation of speculative carry trades paved the way for the volatility and overshoots in both directions during that period.

The routine "ebb" was yen weakness and the "flow" was exaggerated snapbacks in times of stress or volatility as carry trades were popped, or Japanese investors fled repatriated overseas investments. And that was a key reason the yen behaved as a "haven" during any market shocks of that period - something that compounded the moves into the mix.

But after the 2007-2008 Great Financial Crisis a decade ensued where interest rates in virtually all the Group of Seven members gravitated close to Japan's zero level - smothering carry-trade temptations and allowing a relatively stable yen exchange rate to effectively sideline the BOJ's hyperactive currency desk.

In fact, there was no confirmed intervention between the extraordinary earthquake and tsunami shock of 2011 and 2022 - when the post-pandemic, post-Ukraine invasion interest rate spikes elsewhere isolated Japan back at the zero level once again - refiring the carry trade into the bargain.

The wild swings of the past few weeks are just a reminder of the currency's inherent tendency to overshoot. Next Bank of Japan Intervention May Be to Sell Yen_3

Next Bank of Japan Intervention May Be to Sell Yen_3

Normalized yield gaps?

Spin ahead, and it's not hard to see where a burst of yen strength might come from here. As U.S. and other G7 policy rates finally tumble and the carry trade clears out, Japan may feel emboldened to "normalize" further - increasingly confident its decades of post-1990 deflation are over.

Even though markets now think Tokyo may be even more wary of raising interest rates again for fear of upending the stock market as happened earlier this month, the latest GDP update may be encouraging, a new prime minister will be in town soon and the U.S. Federal Reserve will likely start cutting rates next month anyhow.

Two-year benchmark Japanese bond yields have recoiled back below 30 basis points from 15-year highs close to 50 bps at the start of the month. Given that alone, any suggestion of higher rates will warrant a significant repricing.

But the yield gap with the rest of the G7 already has been waning.

Next Bank of Japan Intervention May Be to Sell Yen_4

Two-year spreads versus U.S. Treasuries have fallen by 1.1 percentage points in just over three months, with the dollar/yen only reacting with a three-month lag to that turnaround. It would take another 1.7 point squeeze of that spread to get back to a 10-year average - and that could happen relatively quickly if it's coming from both sides.

Fear of Donald Trump's broad trade tariff pledges if the Republican former U.S. president wins the Nov. 5 election could be another reason for Japan to hold fire for a bit. But Trump is no longer the favorite in either opinion polls or betting markets.

While another move to hike rates could be partly self-defeating if yen strength hits exporters and the wider Japanese economy, the flipside of currency strength is lower import prices that allow more significant real wage rises to deliver the holy grail of domestic consumption growth.

But if yen strength goes too far too fast - then there's always intervention to calm it down.

Source: Reuters

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Warren Takunda

Economic

Central Bank

The Reserve Bank governor, Michele Bullock, has downplayed the role of government spending in keeping inflation elevated, citing consumer spending and China’s slowdown as bigger influences on Australia’s economic trajectory.

“I want to be clear that public demand is not the main game,” Bullock told the House of Representatives economics committee on Friday. Instead, she pointed to consumption, residential construction and trade as “the big swing things that are going to impact us over the next year or so”.

Bullock’s comments come 10 days after the RBA left the cash rate unchanged for a sixth board meeting in a row, with Bullock warning that an interest rate cut was unlikely this year. A week ago, she also said the bank wouldn’t hesitate to lift the rate if annual inflation wasn’t on track to reach its 2%-3% range.

The RBA has raised its forecasts for the pace of growth in spending by federal, state and local governments to an annual clip of 4.3% by December and 4.1% by next June. That compared with its projections three months earlier of spending growth rates of 1.5% and 2.1%, respectively, prompting some to speculate the central bank’s inflation efforts were being undermined by public sector profligacy.

Three months earlier the bank had projected spending growth rates of 1.5% and 2.1%, respectively, prompting some to speculate its efforts to rein in inflation were being undermined by public sector profligacy.

Still, inflation remained “too high” and its reduction from an annual 7.8% peak at the end of 2022 “has been slow”, Bullock said. “Based on what the board knows at present, it does not expect that it will be in a position to cut rates in the near term.”

Among the threats posed to the country’s economic fortunes, China’s weak growth was “a risk that’s very pertinent for us”, Bullock said.

The RBA left interest rates on hold – but don’t get your hopes up for a cut any time soon

China was easily Australia’s biggest trading partner but also critical for the prices of commodity exports, particularly iron ore. Massive over-building – with enough completed apartments to meet years of demand in many cities – has dented consumer sentiment but also curbed output from steel mills and other sectors of the economy.

“That is something that we’re watching quite closely because developments in China can have quite a big impact on the way our trade develops, and therefore on our growth,” she said.

RBA officials also downplayed a rise in insolvencies as firms struggled with higher interest rates. The recent increase was against “absolutely historically low levels” during the pandemic, Bullock said. “I you look at the trend of insolvencies over time, we’re not even back to where we were trend-wise, pre pandemic.”

The assistant governor, Brad Jones, said the construction sector had been “front and centre” to the rise in firms going bust, but they were typically very small enterprises with “low single-digit number of employees”.

In the past six months there had been “some levelling out in the stress in the construction sector”, Jones said, but noted pressure was building in the arts, hospitality and some segments of the retail space.

Source:TheGuardian

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ING

Economic

Property prices continued to decline in July as the bottom remains elusive

The National Bureau of Statistics published the 70-city housing prices for July, which showed home prices continued to decline at around the same pace as the previous month. New home prices fell by -0.65% MoM in July, compared to a -0.67% MoM drop in June. Secondary market prices fell by -0.80% MoM versus a -0.85% MoM move in June. Compared to the peak of the cycle, new home prices are now down -7.6% while secondary market prices are down -13.7%.

In the 70-city sample, 66 out of 70 cities continued to see falling new home prices, while 2 cities showed prices unchanged and 2 cities (Shanghai and Xi'an) showed a slight price increase. In the secondary market, 67 cities saw price declines, with 2 cities (Beijing and Kunming) seeing prices unchanged and Shanghai as the lone city seeing a price uptick.

Construction activity unsurprisingly remained weak. New home starts fell by -23.2% YoY ytd, and housing completions fell -21.8% YoY ytd.

This month's data is a bit of a mixed bag - while we did technically see some silver linings, the positive developments remain very incremental and overall momentum has yet to reach a turning point. We saw a smaller sequential decline in prices in July compared to June, but the difference was very marginal. We did continue to see signs of stabilisation in some of the tier 1 cities, with Shanghai in particular seeing an uptick in prices in both the primary and secondary markets. It is increasingly looking like the property market will continue to need more policy support to establish a bottom.

Property prices have yet to establish a bottom as the decline continues

Fixed Asset investment (FAI) came in softer than expected amid tepid private sector appetite

Fixed asset investment (FAI) was probably the biggest disappointment in the July data dump, falling to 3.6% YoY ytd, compared to consensus forecasts which expected it to stabilise at 3.9% YoY.

Unsurprisingly, property investment remained by far the biggest drag with a 10.2% YoY ytd decline. We expect property investment will remain a drag for some time yet, as prices have yet to confirm a bottom, and housing inventories remain elevated. The overall data continue to be dragged by weak private investment which is now stagnant on the year-to-date at 0.0% YoY ytd. Public investment also slowed more than expected to 6.3% YoY ytd.

The limited bright spots remain in manufacturing FAI, which grew at 9.3% YoY. Rail, ship, and aeroplane manufacturing investments saw very strong 30.1% YoY ytd growth amid recent positive developments in those sectors. There was also continued investment into the computers, communications and other electronic equipment category which saw a solid 14.5% YoY ytd growth due to China's technology self-sufficiency drive.

We have argued that real interest rates have acted as a dampener on investment, and consequently we will look to see if there is any sign of improvement in next month's data following the July rate cuts. However, interest rates are only part of the equation. Overall, confidence is likely a larger inhibitor of investment against a backdrop of widespread pessimism.

Weak property and private sector investment continue to depress FAI

China’s Key Growth Indicators Continue to Present a Case for Further Policy Easing_2

Retail sales recovery is mostly a base effect story

Retail sales rebounded in July to 2.7% YoY, up from the post-pandemic low of 2.0% YoY in June. This growth was in line with our and the consensus forecasts for 2.6% YoY.

Despite the slight beat of expectations, there was not too much to cheer in this month's data.

We continued to see a general outperformance of the "eat, drink, and play" theme. After a surprise YoY contraction last month, the sports & recreation category recovered to 10.7% YoY in July. Catering growth slowed to just 3.0% YoY in July, barely outperforming the headline, but the grains, oil, and food category continued solid outperformance with a 9.9% YoY growth. We saw an unexpected contraction of tobacco and liquor sales in July, which dipped to -0.1% YoY. While it softened in the past several months, this may also be blip.

Other categories continued to broadly reflect weak consumer confidence. Auto (-4.9%), gold and jewellery (-10.4%), clothing and apparel (-5.2%), and cosmetics (-6.1%) all saw negative year-on-year growth in July. Households appear to be cutting back on discretionary consumption, and a general environment of cost-cutting is likely impacting spending decisions; July's uptick in the surveyed unemployment rate to 5.2% and generally weak wage growth nationwide are likely leading to more caution.

Discretionary consumption categories have dragged on retail sales growth this year

China’s Key Growth Indicators Continue to Present a Case for Further Policy Easing_3

Value added of industry slowed as expected

The value added of industry growth moderated to 5.1% YoY in July, down from 5.3% YoY in June, and broadly in line with our expectations. This slowdown was foreseeable given the last few months of weak PMI data. As export demand starts to slow and tariffs come into effect, the momentum may moderate further.

Hi-tech manufacturing continued to outpace broader industry growth rates, with growth accelerating to 10% YoY in July. There was also a continuation of strong growth in computer, communications, and electric equipment manufacturing (14.3%) and rail, ships, and aeroplanes (12.7%). We expect to see these categories continue to outperform due to solid demand driven by the national development strategy.

The auto sector, which has been a strong outperformer in past years, is seeing signs of a slowdown, however. Auto manufacturing growth slowed to just 4.4% YoY in July, well below the 9.0% YoY growth in the year to date let alone the strong double-digit growth of previous years. Auto manufacturing growth was lower than the overall value added of industry growth for the first time since May 2022.

Industrial production has been one of the key drivers for growth in 1H24, but momentum looks to be softening in the second half of the year. Combined with a more challenging base effect, we expect that policies to boost other areas of the economy will be needed if China is to achieve the 5% growth target for the year.

Auto manufacturing tailwind looks to be fading as growth shifts to hi-tech manufacturing

China’s Key Growth Indicators Continue to Present a Case for Further Policy Easing_4

Recent data releases continue to favour further policy support

While it is worth monitoring how the rate cuts from July will begin to affect key macro indicators starting from next month's data, we believe that there remains a solid case for further easing later this year. Weak credit, low inflation, and soft growth should provide plentiful reasons for easing, and if RMB depreciation pressures wane after US rate cuts kick-off, there should be little holding the PBOC back from further cuts.

As last month's case illustrated, holding the MLF unchanged at the scheduled monthly update does not necessarily preclude the PBOC from easing policy at a later time, but it seems more likely that they wait at least another month for the Fed to kick off its rate cuts before making a further move. We continue to expect at least one more rate cut this year, with a fairly high probability to see two more cuts if the Fed cuts proceed along our ING baseline scenario as outlined in this report by James Knightley and Chris Turner.

The slowdown of investment and weak private sector and household confidence also present a strong case for stepping up fiscal stimulus. Many market participants would favour demand-side policy support. However, it is uncertain if policymakers have found a suitable fit in terms of specific policies to implement on this front yet. At the least, ramping up investment in strategic sectors could be a stopgap to support growth. Without further policy support, it will be very difficult to achieve the 5% growth target for the year.

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United States Department of Labor

Economic

Data Interpretation

The U.S. Department of Labor released the latest jobless claims report on August 15.

Initial jobless claims came in at 227,000 for the week ended August 10, lower than the expected 235,000 and the previous week's revised 234,000.

The 4-week moving average was 236,500, dropping from the previous week's revised average of 241,000.

Initial jobless claims have declined for two consecutive weeks despite recent signs that U.S. businesses have hired fewer workers. In the week ending August 10, initial claims for unemployment benefits dropped 7,000 to 227,000, the lowest level since early July. The 4-week average was also down 4,500 from the previous week's revised level.

The successive declines in jobless claims indicate that the economy and hiring are still going well despite rising borrowing costs, and the unexpectedly weak nonfarm payrolls report in July might just have been negatively impacted by Hurricane Beryl. St. Louis Fed President Alberto Musalem also said on Thursday that the economy is growing well and the data does not support the view of a recession. The labor market remains resilient facing high interest rates, easing concerns about a recession. The possibility of a 50bp rate cut in September fell to 26%.