RBA Resumes Rate-Hike Discussion on Renewed Inflation Concerns

Economic

Central Bank

Summary:

Australia's central bank resumed a discussion of interest-rate hikes at its May policy meeting before deciding that the case to stand pat was stronger as it aims to avoid “excessive fine tuning.”

Minutes of the Reserve Bank's May 6-7 gathering showed the board discussed two options when it left the key rate at 4.35%, noting the risks around its economic forecasts were still “balanced” despite stronger-than-expected data in the run-up to the meeting.

“Members considered that the staff forecasts presented a credible path back to the inflation target,” the minutes showed. “Members judged it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning.”

Read more: RBA Retains Neutral Policy Bias as Key Rate Held at 12-Year High

The central bank, which upgraded its near-term inflation forecasts, still expects consumer prices to return to its target in late-2025, from 3.6% in the first three months of this year. The updated forecasts used a technical assumption of no change in rates until mid-2025.

The minutes showed that the rate-setting board had “limited tolerance” for inflation returning to target later than 2026.

“Members agreed that it was important to convey that recent data and other information had signaled that the risks around inflation had risen somewhat,” the minutes showed. “It was difficult either to rule in or rule out future changes in the cash rate target.”

Governor Michele Bullock has previously suggested the RBA won't need to wait for inflation to be inside the 2-3% band before cutting. Even so, she has repeatedly pushed back against speculation over near-term easing, reflecting the RBA's forecasts that inflation will only return to target late next year.

Economists expect the RBA to begin cutting rates in November whereas financial markets are fully pricing in the first easing in the first half of next year.

The RBA's gathering followed a highly-anticipated decision by the Federal Reserve, when Chair Jerome Powell kept hopes alive for a rate cut this year while acknowledging a burst of inflation has reduced confidence that price pressures are ebbing.

Data recently has indicated that Australia's economy is broadly slowing with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment. The RBA said in the minutes that it expects weakness in household spending to continue this year.

At the same time, the labor market remains resilient, giving policymakers optimism that they can engineer a soft landing — bringing down inflation while holding onto the enormous job gains of recent years.

The minutes showed that raising the cash rate could be appropriate if:

The board formed a view that the judgments underpinning the staff forecasts risked being overly optimistic about disinflationary forces
If consumer spending picked up somewhat more rapidly, labor market outcomes remained benign, real household disposable income recovered and household balance sheets remained relatively strong. That together with further growth in public demand and business investment could delay inflation's return to target
If trend productivity growth turned out to be weaker than assumed

Source: Bloomberg

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Alex

Economic

Commodity

Stocks

Asian shares took a breather on Tuesday after seven days of gains, and a gauge of commodities reached a 15-month high. Traders’ focus turns to earnings from chipmaker Nvidia Corp. later in the week.

While Japanese shares rose, stocks in Hong Kong, China and Australian stocks retreated, sending the MSCI all-country gauge lower in early Asian trading after an eight-day advancing streak. Gold changed hands just shy of an all-time high and wheat prices surged. The Bloomberg Commodity Spot Index reached its highest level since January 2023 on Monday.

Trading across financial markets is being shaped by bets on when the Federal Reserve may finally decided to ease monetary policy, as well as views on the US corporate sector and China’s economy regaining strength. At the same time, developments in the Middle East have the potential to trigger a rise in risk aversion.

Asian Stocks Snap Gains as Commodities Rise_1

Nvidia — one of the top companies powering the artificial-intelligence frenzy — is due to report earnings later this week.

“For the market to keep momentum this week, it may come down to just one stock - Nvidia,” said Jay Woods at Freedom Capital Markets. “It sure feels like the hype for this earnings event will be the talk of trading desks and financial media all week.”

In Asia, China’s economic struggles remain in the spotlight, with fresh data showing there’s little sign of a turnaround in its debt-plagued property sector. Local governments reaped the least revenue in eight years through land sales last month, showing the fiscal strains faced by those authorities who depend on such revenue for a large chunk of their total income.

Asian Stocks Snap Gains as Commodities Rise_2

The yield on 10-year US Treasuries was little changed, while that on Japan’s 10-year debt nudged higher.

Australia’s central bank resumed a discussion of interest-rate hikes at its May policy meeting before deciding that the case to stand pat was stronger as it aims to avoid “excessive fine tuning.”

Speaking overnight, Cleveland Fed President Loretta Mester joined the ranks of US policy makers suggesting less scope for interest rate cuts than previously expected.

In the Middle East, developments in Iran and Saudi Arabia have the potential to shape the trajectory of the crisis-plagued region for years to come. The death of Iranian President Ebrahim Raisi’s death in a helicopter crash has opened questions over who might succeed the country’s Supreme Leader Ayatollah Ali Khamenei, who is in his mid-80s. There are also renewed questions over the health of Saudi Arabia’s elderly king.

Source：Bloomberg

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FastBull Featured

Remarks of Officials

Federal Reserve Vice Chairman Philip Jefferson delivered a speech on May 20, local time, with the main ideas as follows.

The U.S. economy continues to grow at a solid pace. Adjusted for inflation, GDP was reported to have increased at a 1.6 percent annual rate in the first quarter of 2024. That was a moderation from a 3.4 percent expansion in the fourth quarter of last year. However, private domestic final purchases—which excludes inventory investment, government spending, and net exports—grew 3.1 percent in the first quarter. That was about as strong as the second half of 2023. Consumer spending growth is expected to slow in the second half of this year.

The labor market remains solid. Monthly payroll gains slowed in April. The supply of workers and the demand for labor continue to come into better balance, which has resulted in nominal wage growth easing.

The April CPI data were encouraging, but inflation remains above the 2% target. It is too early to tell whether the recent slowdown in the disinflationary process will be long lasting. While there has been a recent uptick in Americans' inflation expectations over the next 12 months, long-term inflation expectations remain close to pre-pandemic levels.

I believe that our policy rate is in restrictive territory. The FOMC noted that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.

Housing inflation has been a "sticking point" in the disinflationary process. Due to the calculation method, changes in market rents—the main component of housing inflation—take a long time to pass through to PCE housing services prices. This lag suggests that the large increase in market rents during the pandemic is still being passed through to existing rents and may keep housing services inflation elevated for a while longer. Moreover, fixed-rate mortgages do dampen the effect of monetary policy, but not as much as previously thought.

The housing sector is also a key part of the transmission mechanism of monetary policy. That is one reason why policymakers will continue to pay close attention to this vital sector. Of course, no one sector dictates monetary policy. We look at the totality of the data to set policy and achieve the objectives.

Jefferson's Speech

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Samantha Luan

Political

The sudden death of Iranian President Ebrahim Raisi in a helicopter crash plunges Tehran into fresh uncertainty at a time when it already faces deep economic decline, popular discontent and war.

The helicopter carrying President Raisi suffered a hard landing on Sunday while returning from Azerbaijan in poor weather conditions, Iranian state media reported Monday. Iran’s foreign minister, Hossein Amirabdollahian, also died in the accident.

All eyes are now on what comes next for the Middle Eastern power, which is home to nearly 90 million people and whose government backs a number of regional armed proxy groups including Gaza’s Hamas, Lebanese Shia militia Hezbollah and Yemen’s Houthis.

Some analysts expect a fair degree of continuity, while also noting that this could present an opening for Iran’s powerful Revolutionary Guard to gain even more control over the country’s political direction.

“This incident occurs against a backdrop of extremely high tensions in the region, which is already on edge due to the ongoing conflict in Gaza and recent military exchanges between Iran and Israel,” Sina Toossi, a longtime Iran analyst and senior fellow at the Center for International Policy, wrote in a post on X.

“There is also growing rhetoric among Iranian officials about weaponizing the country’s nuclear program,” Toossi wrote. “Furthermore, the aging Supreme Leader Khamenei’s succession is a significant factor in Iran’s political landscape, compounded by a crisis of legitimacy facing the Islamic Republic. Raisi’s death would contribute to an already volatile situation.”

Elected in the summer of 2021 amid the lowest voter turnout ever for an Iranian national election, Raisi was a hard-line right-winger seen as a potential successor to the Islamic Republic’s 85-year-old Supreme Leader Ayatollah Khamenei. The remaining contender for the position of Iran’s most powerful leader is Mojtaba Khamenei, the supreme leader’s son.

The 63-year-old Raisi was a harsh critic of the West, who cracked down heavily on the protest movement that swept the nation following the death of a young Kurdish Iranian woman, Mahsa Amini, while she was in the custody of Iran’s morality police in September 2022.

Hundreds of people were killed during the crackdown, although this was not Raisi’s first time overseeing death and executions; as a young prosecutor in Tehran in 1988, Raisi was part of a panel that directed the executions of hundreds of political prisoners, according to reporting by Amnesty International.

Asked to comment on his record in 2021, Raisi said, according to Reuters, “If a judge, a prosecutor, has defended the security of the people, he should be praised ... I am proud to have defended human rights in every position I have held so far.”

His death now sets into motion a preestablished succession process that empowers current Vice President Mohammad Mokhber to assume the interim presidency and hold an election within the next 50 days.

Elections in Iran are considered unfree, as the powerful and ultra-conservative Guardian Council ultimately decides who is allowed on the ballot in the first place.

“What we’ve been seeing the last few years really is a power struggle between the IRGC on one side with other conservatives factions,” Nader Itayim, Mideast Gulf Editor at Argus Media, told CNBC’s “Capital Connection” on Monday.

Over the next 50 days of the interim presidency, the Revolutionary Guard’s role in Iran’s upper echelons of power is “going to remain intact and even potentially intensify,” Itayim said. “That interim presidency ... [is] going to potentially pave the way for even more IRGC control over policies.”

The relationship with Israel and the U.S.

Crucially, though, “Iran is not going to change course simply because of this,” with regard to foreign and domestic policies, Itayim said.

“When it comes to the relationship with the U.S., and likely [with] Israel, nothing is really going to change there. There’s wider issues at play between these countries and those are likely going to stay, those are deep-rooted issues.”

Iran has refused to have formal diplomatic relations with the U.S. and rejected recognizing the state of Israel for decades, and remains under the weight of severe U.S. and Western sanctions. Attempts to make progress in talks to revive the Iranian nuclear deal repeatedly failed over the course of the Joe Biden presidency.

Amid Israel’s war with Hamas in the Gaza Strip, Israel and Iran have traded missile and drone barrages, putting the region on edge and spiking fears of a wider war in the Middle East.

Raisi’s death “comes at a difficult time for Iran,” according to Sanam Vakil, director of the Middle East and North Africa program at Chatham House — but the world should still expect continuity, as the Iranian presidency is not where the state’s power truly lies.

“The President is in theory second-in-command within the Iranian state, but he doesn’t have the same sort of independence and ability to maneuver as president and many Western democracies do. He serves at the behest of Iran’s supreme leader,” Vakil said Monday.

“He also doesn’t have independent foreign policymaking authority,” she added. “So his death will really be more about filling his place finding someone to step up and step in to maintain cohesion within the system.”

Iranian regime’s ‘rock-bottom credibility’

Public trust in Iran’s government is at a dramatically low point.

Election turnout in the last few years has been among the lowest in the Islamic Republic’s history, protests over issues from women’s rights to corruption to water supplies routinely crop up around the country, and Iranians speaking to CNBC described local reactions to Raisi’s death as “overjoyed.”

“Raisi’s departure offers the regime something of an opportunity, as his failures in office and general unpopularity had tarnished his reputation within the political system,” Gregory Brew, an Iran and energy analyst at risk consultancy Eurasia Group, wrote in a note.

It “creates space for a new hardliner figure to take his place as president, offering the regime the opportunity to wipe the slate clean.”

That isn’t much comfort to many Iranians, who have seen their cost of living skyrocket and their access to the rest of the world shutter amid heavy sanctions, currency depreciation and government mismanagement of the economy.

“New elections are likely to demonstrate the broad dissatisfaction of the public as well as the regime’s rock-bottom credibility,” Brew wrote. “There is likely to be public resistance and possibly even some violence in response to another stage-managed election, though it is unlikely to present a serious challenge to security forces or the regime’s hold on power.”

Turnout at the polls would likely once again be low, and the new president “would assume office with very little legitimacy,” he wrote. “Moreover, a new hardliner figure will face the same challenges as Raisi, including the current regional crisis, a sanctioned economy, and a looming succession crisis should Supreme Leader Khamenei die.”

Source：CNBC

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Owen Li

Economic

Stocks

Citigroup Inc., the top arranger of equity offerings in India this year, sees four to five IPOs of at least $1 billion each over the next year. At least 10 companies are weighing offerings of more than $100 million, according to data compiled by Bloomberg.

A flurry of small deals has made India one of Asia's busiest IPO markets this year. Bigger share sales brighten the nation's chances of attracting global funds as investors rotate money amid a patchy recovery in China. A mix of factors is behind the exuberance — stocks are scaling new heights, economic growth is solid and earnings are beating estimates.

At the start of the year, “we saw a lot of smaller IPOs coming to market, not large ones. What we are seeing is a big shift in this trend with average IPO sizes going up meaningfully,” said Jibi Jacob, the head of equity capital markets for Jefferies in India.

The timing to go public is also influenced by India's ongoing elections. The poll outcome on June 4 will give a clear picture of political stability and policy continuity, removing any lingering uncertainty for companies.

Potential issuers include e-commerce startup BrainBees Solutions Ltd., which retails baby products under the brand name FirstCry.com, hypermarket operator Vishal Mega Mart, and SoftBank Group Corp.-backed ANI Technologies, which is the operator of ride-hailing app Ola Cabs. Hyundai Motor Co. is also exploring the listing of its India unit that may raise about $2.5 billion.

The performance of recent mid-size debuts is also boosting sentiment. Pharmaceutical company Indegene Ltd., finance firm Aadhar Housing Finance Ltd. and travel distributor TBO Tek Ltd. all popped on their first day of trade this month. With a 72% surge in IPO proceeds to $3.4 billion so far this year, India has surpassed Hong Kong and South Korea, data compiled by Bloomberg show.

Waiting on Sidelines

Mutual funds, which have been seeing more than $2 billion of flows coming through monthly investment plans, have emerged as key investors in IPOs.

“The appetite for bigger IPOs is also supported by the growing size of flows coming to mutual funds because they need paper,” said Sunil Shah, group CEO at Mumbai-based Khambatta Securities Ltd. “If there is no supply of new paper, where do they invest?”

While Indian stocks have beaten emerging market peers on the back of domestic fundamentals, poll jitters in recent weeks stoked volatility. With Prime Minister Narendra Modi widely expected to secure a third term, India bulls are optimistic the outperformance will resume soon.

“Some large issuers have been waiting on the sidelines for some time. While some were not ready for different reasons, others have been waiting for going to market post elections, expecting big policy announcements to follow,” said Rahul Saraf, Citi's India head of investment banking. “In addition, there's deeper liquidity and attractive valuations. All of these pieces are coming together in a way that doesn't happen very often.”

Source: Bloomberg

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Devin

Economic

Central Bank

That is according to HSBC chief economist for Australia and NZ Paul Bloxham, who made headlines a decade ago when he said New Zealand would be the "rockstar economy of 2014".

But now he says times are tough, and the picture is a lot different.

"I described it as a rockstar 10 years ago when lots of things were going in a positive direction," he said.

"You were a big exporter of dairy and meat products, getting a big influx of tourists promoting growth as well."

Now, rockstar status was something the country would have to aspire to, he said. Households in particular had borne the brunt of getting the economy in balance again post-Covid.

All the focus of battling inflation had gone on denting demand, but policy-makers would also need to work on improving the supply side of the economy to beat the country's inflation problem, he said.

There needed to be a focus on looking for the things that New Zealand did best to grow the economy, he said.

"A clearer focus on what the growth engines are and how to best make use of those to grow the economy. Deregulation ought to play a role, making labour markets as flexible as possible ought to play a role."

Where NZ finds itself

He said times were tough for New Zealand, with unemployment rising, the economy tipping into recession and four of the past five GDP updates showing declines.

Bloxham said that situation had been created because when New Zealand emerged from lockdowns, demand picked up, but the supply side of the economy was not ready to deliver enough goods and services to meet that demand.

"What you had was a big pickup in inflation, policy-makers responded, central banks responded by lifting interest rates.

"The Reserve Bank has lifted its policy rate by 525 basis points… it was one of the earliest central banks to lift interest rates. The intention was to lift interest rates, slow down the economy and get inflation to come back to target. In doing that they've delivered a recession."

Higher interest rates were weighing on households, he said. The impact of that could be seen in consumption figures, which had been weak and falling over the past year.

He said it did not necessarily have to be that way.

Where NZ went wrong

"A better way to get inflation to come down would be at the same time to be seeing a large improvement on the supply side — not just weakened demand but an improvement in supply. Some countries have had that. America has had quite a large pickup in productivity which has helped to bring inflation down."

He said New Zealand's supply response had been "dismal" compared to the rest of the world.

"Inflation has been coming down very, very slowly. Inflation isn't yet back where the Reserve Bank needs it to be."

He said the biggest risk to the economy was that inflation continued to persist and remained sticky at elevated levels. That would mean a longer period of weak demand could be seen to be needed.

"It's a really tough spot to be in. The Reserve Bank has lifted interest rates to get inflation to come down and it has pushed the economy into a downturn but you've still got inflation that's sticky and elevated."

He said he did not expect the Reserve Bank to be able to lower the cash rate until the end of the year.

"We think ahead of Christmas there might be a bit of rate relief coming through."

So, what now?

Bloxham said improving productivity and flexibility of the supply side of the economy would be a big question for the upcoming Budget to address.

"Are the policy settings going to help to improve the supply side of the economy? Will there be measures taken by Government that aim at lifting productivity? That's what ought to be in focus… The Reserve Bank has lifted a lot and that has had a big effect on slowing down consumers but it still hasn't got inflation down quickly."

New Zealand's closed borders had been very disruptive to supply, he said.

"The first thing that happened [when borders reopened] was a net outflow and that tightened the labour market even more… that has gummed up the supply side of the economy. Even with a weakening in demand and slowdown in the economy overall."

Source: 1News

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Remarks of Officials

The Reserve Bank of Australia (RBA) released the minutes of its May monetary policy meeting on May 21, local time. The main excerpts are as follows.

Labour market conditions had eased by less than had been anticipated. The unemployment rate was still only modestly above its late-2022 trough. The participation rate and employment-to-population ratio also remained near record high levels, though average hours worked and job vacancies had both declined further.

Inflation had eased further in the March quarter, but the pace of disinflation had slowed and the recent inflation data were stronger than had been expected in February. Services price inflation had peaked but remained high, particularly for services that are less discretionary.

The Australian dollar had appreciated a little since the previous meeting. On a trade-weighted basis, the Australian dollar had been supported by the depreciation of the yen and the renminbi.

The labour market was projected to continue easing, though the easing was now expected to take longer than previously thought. Unemployment was expected to be around the level consistent with the Board's full employment mandate by mid-2025. Inflation was expected to reach the target range of 2–3 per cent in the second half of 2025 and the midpoint in 2026. Inflation may not return to the target range over the forecast period if the labour market were to be tighter than assumed in the projections. On the other hand, there would be excess unemployment over this period and a faster decline in inflation if the labour market were to have more capacity than assumed.

Overall, the economy, labour market, and inflation had slowed less than expected.

While there had been notable updates on the state of the economy since the previous meeting, the updates had not been sufficient to warrant a change in the stance of monetary policy. Inflation was still declining towards the target and the recent information did not materially alter its trajectory.

Returning inflation to target remained the Board's highest priority. This process was unlikely to be smooth and members recognised the considerable uncertainty about the outlook for both inflation and the labour market. Given this, members agreed that it was difficult either to rule in or rule out future changes in the cash rate target. They reiterated their resolve to do what is necessary to return inflation to target, and to continue paying close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.