RBA Remains on Hold, Slowly Gaining Confidence

Central Bank

Summary:

The RBA remains on hold with the cash rate kept at 4.35%. But the Board is gaining confidence in its own forecasts that inflation is coming down.

As expected, the RBA Board held the cash rate steady at 4.35% following its meeting this week. The Board remains concerned that underlying inflation remains above target, with the key trimmed mean measure at 3.5% over the year to the September quarter. It infers from this level of inflation that aggregate demand continues to outstrip aggregate supply. The Board is therefore resolved to keep monetary policy restrictive until it is clear inflation is returning to target on the desired timetable.

It still expects that it will be ‘some time yet’ before inflation returns sustainably to the 2–3% target and approaches the midpoint of 2½%. However, it has changed its language and is no longer saying that it is ‘not ruling anything in or out’, as it had in every statement since March. The word ‘vigilant’ has also been cut from the post-meeting statement. Rather, the Board is ‘gaining some confidence that inflationary pressures are declining in line with these recent forecasts’. In other words, we are getting closer to the point that the RBA will be comfortable cutting rates. And in a shift in view that will surprise almost nobody, it no longer feels the need to flag the possibility of a rate hike. The post-meeting statement highlighted that ‘some of the upside risks to inflation appear to have eased’.

Indeed, some of the Governor’s answers in the post-meeting media conference opened the door to a more dovish view than we have seen from the Bank recently, including in her most recent speech. That said, her opening statement and answers today continued to emphasise the RBA’s assessment that aggregate demand exceeds aggregate supply and the current level of (trimmed mean) inflation is the best indicator of where that balance lies.

The Board assesses that monetary policy is ‘working as expected’ in bringing demand and supply into alignment, with the gap between the two continuing to close. Although there was still a nod to weak productivity growth, the post-meeting statement also highlighted the downside risks to household consumption and thus overall growth and the labour market.

Since the last Board meeting, Wage Price Index (WPI) and national accounts data have been released. The WPI data was noticeably softer than would be required to meet the RBA’s November forecast for growth over 2024, as we noted at the time. Similarly, although the RBA did flag that it expected consumption to be flat in the September quarter, GDP overall was softer than consensus and, we suspect, the RBA’s own expectations. (The RBA only publishes forecasts for June and December quarters, not the intervening March and September quarters.) A Q4 bounce large enough to match the RBA’s forecasts for 2024 growth is unlikely to eventuate for either series. Further downgrades to the RBA’s near-term forecasts can therefore be expected in the February round.

In today’s statement, the Board acknowledged that wage pressures had eased more than it previously expected. During the media conference, the Governor initially sought to characterise the data flow as showing the ‘real-side’ data (output, consumption) as soft but the nominal side – inflation – as still too high. It was only after some further questioning that the downside surprise on wages growth – an important nominal variable – got a mention.

Similar to earlier RBA communications, the Board statement pointed to the apparent stabilisation in the unemployment rate and some other measures of labour market tightness as signs that the labour market was still in a state of more than full employment. Indeed, the language of the paragraph on the labour market was only minimally changed from last month, bar some minor factual updates and a decision not to start a sentence with ‘But’.

The concentration of recent employment growth in the non-market sector did not rate a mention in the post-meeting statement. In the media conference, however, the Governor was asked about the risk that employment growth in the non-market sector slows. So far, the RBA seems content to rely on other sectors bouncing back in time, along with household consumption. We hope it is right, but we are not confident that handover will happen quickly enough.

Overall, the tone of today’s communication was less hawkish than the November round, appropriately so given the data flow since then. The ‘more than one good quarter’ language from the November minutes has again been clarified to indicate that other data matter, too, rather than the meaning some observers took (‘at least two quarters of good CPI data from here’). As we noted at the time, even if that was the right interpretation, things can pivot quickly if the data flow demands it.

We have recently revised our view of the likely path of the cash rate to a base case of a first cut in May. As we said at the time, though, we cannot entirely rule out an earlier start date of 18 February or 1 April should outcomes continue to undershoot the RBA’s expectations, especially for trimmed mean inflation. Today’s change of language represents a welcome acknowledgement that disinflation remains on track and that we are getting closer to the point that some of the current policy restrictiveness can be withdrawn. And in the media conference, the Governor conceded that there were scenarios in which the Board ended up cutting in February, while prudently choosing not to describe one.

In acknowledging that reality, the RBA has clearly tilted the probabilities back towards an earlier start date for the rate-cutting phase than where it stood a few weeks ago. It does not, however, shift that balance of probabilities enough to change our base case to be earlier than May just yet. The RBA still assess aggregate demand as exceeding aggregate supply. While ever it continues to believe this, it will be cautious about embarking on rate cuts. Any shifts back towards an earlier timetable depend on the data flow from here, especially on the labour market and trimmed mean inflation.

Source:Westpac Banking Corporation

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Cryptocurrency

The Cryptocurrency Fear and Greed Index is at 78 (extreme greed), as it was the day before, but it now looks like a lagging indicator that doesn’t account for the latest dip.

Crypto Market Spooked by Another Bitcoin Pullback Below 100K_1

The bulls in Bitcoin once again failed to consolidate above 100K on Monday, which was followed by an impressive sell-off, bringing the price to 94K at the lowest point. There is still a wall of orders clearly visible intraday, keeping the price below 95K for a long time, but the interest in selling above 100K remains unsatisfied until the end.

We still see the potential for the first cryptocurrency to rise into the 120K area once it overcomes resistance at 100k.

News Background

According to CoinShares, global investment in crypto funds rose to an all-time high of $3.851bn last week, renewing the record set two weeks ago. The positive trend continued for the ninth consecutive week. Bitcoin investments rose by $2.546 billion; Ethereum rose to an all-time high of $1.16 billion; XRP rose by a record $134 million; and Solana fell by $14 million.

MicroStrategy bought an additional 21,550 BTC for $2.1 billion at an average price of $98,783, founder Michael Saylor said. MicroStrategy now owns 423,650 BTC, purchased for $25.6 billion at an average price of $60,324 per coin.

Since 8 November, long-term investors have reduced their positions by 827,783 BTC (~$81.2 billion), which was only 30% offset by MicroStrategy and spot ETF purchases. The rest was bought up by short-term holders who are actively leveraged and vulnerable to falling quotes.

BlackRock highlighted Bitcoin’s potential as a new diversification tool alongside gold in its Global Outlook 2025. The limited supply of coins and growing investor demand drive BTC’s potential.

Source:FxPro

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Warren Takunda

Economic

European equities dipped on Tuesday, taking cues from tech-led declines on Wall Street rather than building on stimulus-fueled gains in China, while the Australian dollar slid as the central bank suggested rate cuts were finally approaching.

The main scheduled events of the week are still to come, however, with U.S. inflation data due on Wednesday, and a meeting by the European Central Bank on Thursday. With an ECB rate cut all but certain, investors will be watching for clues about its policy path.

Also top of mind for investors in emerging markets was Brazilian President Luiz Inacio Lula da Silva undergoing surgery in Sao Paulo to drain a bleed on his brain linked to a fall at home in October, according to a medical note published by the government.

MSCI's world share index was down 0.15% with Europe's broad Stoxx 600 index off 0.3%, walking back some of its gains the previous day when news from China's Politburo drove hopes of more accommodative policy in the world's second-largest economy.

State media outlet Xinhua reported on Monday that top Communist Party officials had shifted the monetary policy stance from "prudent" to "moderately loose" ahead of the target-setting Central Economic Work conference this week, mirroring their response in previous crises

Chinese bluechips, which had closed before Monday's announcement, rose 0.7% on Tuesday as did stocks in Japan and Korea, the latter up 2.4% helped by authorities' vowing measures to stabilise markets in a bid to calm investors spooked by political turmoil.

The Dow shed more than half a percent, while the S&P 500 and Nasdaq each lost about six tenths of a percent.

Though Hong Kong stocks, which had a chance to react to the news on Monday, dipped on Tuesday, and the runaway rally in Chinese bonds, which extended on Tuesday to drive 10-year and 30-year yields to record lows suggests some investors doubt the pledges are going to lift long-run growth in China.

The Politburo meeting announcement, as it related to the policy stance, "adopted (the) strongest tone in decades," said Chen Shujin, head of China financial and property research at Jefferies.

However, she added: "We still see the market repeating the pattern from the beginning of the year, driven by expectation on potential stimulus, and dragged by lower-than-expected policies."

Overnight, the S&P 500 fell 0.6% and futures dipped 0.07% in the European morning.

A 2.5% drop for chip titan Nvidia, which edged a fraction lower still in after-hours trade following China opening an antitrust investigation, weighed on the mood.

CENTRAL BANKS

Elsewhere, the Reserve Bank of Australia, which has yet to join the global rate cutting cycle, left its cash rate unchanged at 4.35% as expected.

However, the Australian dollar fell 0.7% to $0.6394 as Governor Michele Bullock left the door open to a cut in interest rates as early as February.

"The currency must now count on soft U.S. CPI tomorrow for buyers to return," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

That U.S. price data is the most important piece of global economic data this week. It is the last scheduled event that could possibly disrupt market expectations that the Federal Reserve will cut rates at its meeting next week.

Core inflation is expected to hold at 3.3% for November, and an in-line reading should be no impediment to an easing.

Traders are also expecting rate cuts in Europe and Canada later this week and are leaning towards a 50 basis point cut in Switzerland as authorities may like to tap the brakes on the franc's relentless rise against the euro .

The euro traded at $1.0529, down a touch, and 0.9264 francs. The Japanese yen , which was the best-performing G10 currency in November as expectations have grown for a December rate hike in Japan, was a touch weaker at 151.45 per dollar.

Positioning data shows speculators flipped to a long yen position last week for the first time in more than a month.

Oil prices slipped on Tuesday as concerns eased about the potential regional fallout from Syrian President Bashar al-Assad's overthrow, but China news gave some support.

Brent crude futures were flat at $72.11 a barrel.

Gold nudged up to $2,664 an ounce while bitcoin fetched $97,526.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

The Pound to Australian Dollar exchange rate (GBP/AUD) jumped to 1.9944 (+0.75%) after the RBA said at its final interest rate decision of the year that it was "gaining some confidence that inflation is moving sustainably towards target."

The RBA kept interest rates unchanged at 4.35%, but the FX market was always more interested in whether or not the central bank would alter its guidance. The shift in tone means the RBA has effectively dropped neutral guidance and has engaged an easing bias.

Australian two-year government bond yields fell by 9bp as markets brought forward the expected start date for the first cut, with odds of a February move rising.

Falling bond yields, in turn, weighed on Australian Dollar exchange rates.

"AUD/USD briefly fell to 0.6380 after the RBA left the cash rate at 4.35% and provided a dovish tilt in its post‑meeting statement. AUD/USD may ease further and set a new year-to-date low below 0.6350," says Joseph Capurso, FX strategist at Commonwealth Bank of Australia.

Above: AUD faces new lows against GBP (top) and USD.

Additional evidence of a shift in stance was the dropping of the phrase that is "not ruling anything in or out", as it had in every statement since March.

The word "vigilant" has also been cut from the post-meeting statement.

"We are getting closer to the point that the RBA will be comfortable cutting rates. And in a shift in view that will surprise almost nobody, it no longer feels the need to flag the possibility of a rate hike," says Luci Ellis, Chief Economist at Westpac.

Investment bank GBP/AUD consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. Featuring the median, mean, high and low points forecasted by over 30 investment banks.

Markets saw the potential for the RBA's stance to soften following last week's below-consensus Australian GDP release, which showed economic growth had slowed materially in the third quarter. What growth there was largely came from government expenditures.

"GDP overall was softer than consensus and, we suspect, the RBA's own expectations," says Ellis. "A Q4 bounce large enough to match the RBA’s forecasts for 2024 growth is unlikely to eventuate for either series. Further downgrades to the RBA’s near-term forecasts can therefore be expected in the February round."

Marcel Thieliant, Head of Asia-Pacific Research at Capital Economics, says all this opens the door to a rate cut at the Bank’s February meeting.

However, Capital Economics sticks with the view that the RBA will still wait until May before pulling the trigger.

Thieliant says the unemployment rate is still below the RBA's estimate of full employment, and the RBA will want to see a further loosening of the labour market before cutting interest rates.

"Accordingly, we're sticking to our forecast that the first rate cut won’t come until the Bank's May meeting," he says.

ANZ, one of Australia's largest banks, also maintains that the RBA will wait until May.

For AUD, whether the RBA moves in February or May will be a key driver of movement in early 2025.

China a Source of Support to AUD

The Australian Dollar's post-RBA decline might have been more significant were it not for the supportive tailwinds blowing in from China, where authorities are set to provide more support to the economy.

The Aussie and Kiwi Dollars were the top-performing G10 currencies on Monday after China's politburo said the country's monetary policy stance would shift from "prudent" to "moderately loose" for the first time since the global financial crisis.

It said the government would adopt a more "pro‑active fiscal policy."

"More accommodative policy will help support consumption and the broader economy. The pledges align with our expectations that the government will deliver more fiscal stimulus to counter the negative impacts of additional US tariffs on Chinese exports," says CBA's Capurso.

China could be a source of support for Australia in 2025, which would limit AUD downside in the event that the RBA cuts as early as February.

Source: Sharecast

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Stocks

London stocks fell in early trade on Tuesday following a downbeat session on Wall Street and as sentiment took a hit after another London-listed firm announced plans to move its primary listing to the US.

At 0825 GMT, the FTSE 100 was down 0.4% at 8,321.49.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: "The FTSE 100 opened lower this morning, handing back some of yesterday's 0.6% gain. Yesterday’s rally was powered by mining stocks and fuelled by China's promise of economic stimulus, including looser monetary policy and support for property prices. But as we’ve seen with mini-China rallies in the past, it seems the buzz is fading as investors take a step back to reassess the bigger picture.

"Equipment rental giant Ashtead is packing its bags and heading stateside, dealing another blow to UK markets. The move had been whispered about for a while, despite Ashtead previously insisting there were no such plans. It’s a logical leap - most of its leadership is already US-based, and the States are its biggest market. There will still be a secondary listing in the UK, albeit with less stringent requirements than a full listing.

"As for today’s results, they were a let-down, missing expectations across the board and topped off with a guidance downgrade. Sluggish commercial real estate is still a drag, but investors can find a silver lining in easier comparable quarters on the horizon and the longer-term tailwind of mega projects in the US."

Ashtead tumbled nearly 9% on the listing news and as it delivered a profit warning due to weaker local construction market dynamics in the US.

It said rental revenues are now expected to grow by just 3-5% over the full year, compared with earlier guidance of a 5-8% improvement, owing solely to a downgrade in US rental growth to 2-4% from 4-7% previously.

Prudential was also in the red following a report it is considering options for its asset manager Eastspring Investments that include selling a minority stake to help broaden the business.

Moonpig fell sharply after saying it swung to a pre-tax loss in the first half as it pointed to "challenging" trading in its Experiences segment.

On the upside, British Land rallied after an upgrade to ‘buy’ at Goldman Sachs, while Unite was lifted by an upgrade to ‘overweight’ by JPMorgan.

Hikma Pharmaceuticals nudged higher after an upgrade to ‘outperform’ at RBC Capital Markets.

British Gas owner Centrica was trading up as it said it expects full-year profits to match analysts' estimates and beefed up its share buyback programme by £300m.

FirstGroup gained as it announced its entry into the London bus market after agreeing to buy the French state-owned RATP Dev Transit London, an operator with a 12% market share, for £90m.

Source: Sharecast

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Warren Takunda

Stocks

Shares were mostly higher Tuesday in Asia as Chinese stocks were buoyed by an apparent shift in Beijing toward easier credit and other forms of stimulus for the sluggish economy.

Market superstar Nvidia’s shares fell 0.6% in afterhours trading, extending a 2.6% loss after China said it was investigating the company over suspected violations of Chinese anti-monopoly laws.

The Shanghai Composite index gained 0.6% to 3,422.66 while Hong Kong’s Hang Seng shed early losses, falling 0.4% to 20,326.44 as traders sold to lock in earlier gains.

At a meeting announced late Monday, top Chinese leaders agreed on a “moderately loose” monetary policy for the world’s second-largest economy. That’s the first move in 10 years away from a more cautious, “prudent” stance. A major planning meeting expected Wednesday could also bring more support for the Chinese economy.

But the latest economic data were less positive, with exports rising less than expected in November and imports falling nearly 4%. Recent price data also have been weaker than anticipated, suggesting demand remains weaker than hoped for.

Tokyo’s Nikkei 225 gained 0.5% to 39,367.58, while the Kospi in South Korea jumped 2.4% to 2,417.84, recovering some of its recent losses as the country’s recent political turmoil simmered on.

On Tuesday, South Korean prosecutors were seeking to formally arrest the former defense minister alleged to have colluded with President Yoon Suk Yeol in imposing martial law last week, as both men are being investigated on rebellion and other charges.

Taiwan’s Taiex shed 0.6% as the government said China’s military appeared to be preparing for widely anticipated drills in response to a recent visit by its president, Lai Ching-te’s visits to Hawaii and Guam. Taiwan’s defense ministry said Monday that it has detected Chinese naval and coast guard ships entering the Taiwan Strait and the western Pacific and that China had restricted airspace along its southeast coast through Wednesday.

The moves have ratcheted up tensions after U.S. President-elect Donald Trump said he would not commit to defending Taiwan if China were to invade during his presidency.

Elsewhere in the region, Australia’s S&P/ASX 200 slipped 0.4% to 8,393.00. Markets in Thailand were closed for a holiday.

On Monday, the S&P 500 fell 0.6% to 6,052.85, coming off its 57th all-time high of the year so far. The Dow Jones Industrial Average dipped 0.5% to 44,401.93, and the Nasdaq composite pulled back 0.6% to 19,736.69.

Nvidia’s decline was by far the heaviest weight on the S&P 500. It has skyrocketed to become one of Wall Street’s most valuable companies because its chips are driving much of the world’s move into artificial-intelligence technology. That gives its stock’s movements more sway on the S&P 500 than nearly every other.

U.S.-listed stocks of several Chinese companies climbed, including a 12.4% jump for electric-vehicle company Nio and a 7.4% rise for Alibaba Group. Stocks in Shanghai.

The week’s highlight for Wall Street will arrive midweek when the latest updates on inflation arrive. Economists expect Wednesday’s report to show consumer inflation was little changed last month. A separate report on Thursday, meanwhile, could show an acceleration in inflation at the wholesale level.

They’re the last big pieces of data the Federal Reserve will get before its meeting next week on interest rates, where it is expected to cut its main interest rate for the third time this year.

The Fed has been easing its main interest rate from a two-decade high since September help the slowing jobs market, after bringing inflation nearly down to its 2% target.

In the oil market early Tuesday, a barrel of benchmark U.S. crude gave up 39 cents to $67.98 per barrel. It rallied 1.7% Monday to settle at $68.37 following the overthrow of Syrian leader Bashar Assad, who sought asylum in Moscow after rebels. Brent crude, the international standard, lost 37 cents to $71.77 per barrel. On Monday it added 1.4% to $72.14 per barrel.

The price of gold rose 0.1% to $2,689.20 per ounce after gaining 1% a day earlier amid the uncertainty created by the end of the Assad family’s 50 years of iron rule.

The U.S. dollar rose to 151.59 Japanese yen from 151.22 yen. The euro fell to $1.0550 from $1.0555.

Source: AP

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Alex

Stocks

Institutional investors have increased their holdings in the local stock market over the past four sessions, picking up shares dumped by retail investors' panic-triggered selloffs, data showed Tuesday.

The collective move is best encapsulated by “buy the dips,” whereby investors consider the newly lowered price a short-term development and expect the asset to rebound over time.

Brokerages say the local bourse has essentially bottomed out, recommending an overweight position, or buy. However, whether the past four months of foreign net offloading will see a dramatic recovery remains unclear, as indicated by extended political uncertainty over when the beleaguered president will resign or be removed.

According to the Korea Exchange, the main bourse KOSPI and secondary tech-heavy Kosdaq ended at 2.78 percent and 5.19 percent lower, respectively, Monday.

Propelling the short-term bearish sentiment was net selloffs of over 1 trillion won ($700 million) by retail investors. The KOSPI and Kosdaq saw about 889.8 billion won and 301.5 billion won in respective reduced holdings of retail investors.

The development was evocative of the Aug. 5 market rout, when the KOSPI plunged 8 percent on fears of a potential U.S. economic recession.

The shares recently offloaded were acquired by institutional investors. They net purchased 1.6 trillion won over the past four trading days.

Pension funds bought 842.3 billion won, increasing holdings of large-cap Samsung Electronics and SK hynix shares.

Foreign investors net purchased 100 billion won, Monday, snapping the previous three days of net selloffs of over 1 trillion.

However, the one-day turn of event is far from a meaningful shift to reorient the past four months of net foreign selloffs.

Foreign stakes have been on a downtrend since September amid trade and tariff concerns ahead of the second Donald Trump presidency.

According to NH Investment & Securities, foreign stakes in the KOSPI came to 31 percent, down from the previous peak of 35 percent in July.

The brokerage affiliate of NongHyup said the Corporate Value-up shares are unlikely to turn bullish due to the martial law fiasco.

“Only telecommunication services providers will remain a valid near-term portfolio, given their high dividends,” it said.

The extended impeachment debacle has wiped out "Santa rally" anticipations around Christmas, compounded further by an outright loss in momentum for eliminating the so-called “Korea discount.”

Forbes, a U.S. media outlet, said Friday (local time) that Yoon “proved investors behind the ‘Korea discount’ right.”

“He just validated their sense that Korea Inc. is less ready for global primetime than many thought,” the magazine read. “Yoon also reminded the globe of past Korean military-rule episodes — dating back to 1948 — that a succession of South Korean governments worked very hard to move beyond.”

It added, “When investors think of martial-law enforcers in modern-day Asia, minds leap to Indonesia, Myanmar, the Philippines, Thailand and now South Korea, too. That’s quite a legacy, President Yoon.”