Since the last RBA statement, we have seen some positive factors feeding into what should be another cautiously optimistic outlook on both the global and domestic economy. With much reference to the near term revival in Chinese demand for raw materials, we have seen a strong rise in industrial metals, where copper in particular has caught the eye, but with the recent wave of construction, there may be some references to a temporary pass through affect. Australia recognises the challenging economic shift in China, and has and will continue to maintain expectations for slower growth, and therefore demand next year.
Closer to home, the labour market has been healthier, and whilst most central banks are wary of slow wage growth, steady gains in jobs are expected to see some pick up eventually. On the broader theme of inflation, core rates have dipped a little, but are expected to pick, and are likely to continue with this outlook as capacity utilisation picks up.
More recently, the components for Q2 have been very strong, and all point to a good number on Wednesday, with over 9% growth in construction work as well as CapEx, we are very likely to see consensus forecasts of 0.8% rise met - if not, exceeded. Despite these positive factors, the RBA are more than likely to remain on hold, but governor Lowe has said in recent weeks that the next move is more likely to be up, and with other central banks also reining in loose policy, the board may set out to further highlight this shift in sentiment, but with as measured communication.
It will not have gone unnoticed that the EUR as taken off in anticipation of an ECB move, so given concerns over currency appreciation, we expect a balanced statement with the familiar caveats of household debt levels restraining consumption, already hampered by sluggish earnings pick. Indeed, housing credit growth has outpaced income growth, so as long as this remains the case, the RBA will err on the side of caution.
Rhetoric on the AUD per se should again be confined to further appreciation from current levels generating a slower pick up in activity along with inflation, which is pretty much par for the course. The Board will also again highlight USD weakness impacting on AUD exchange rates, and this has helped support the spot rate to some degree, which looks unlikely to see any major volatility in the aftermath of the announcement - if anything, a modest skew to the upside.
