Shadow Board

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Donald Trump’s assumption of the US presidency since the last RBA Shadow Board round two months ago raises important questions about the future health of the global economy.
Domestically, consumer prices rose a little faster, by 1.5% year-on-year in the December 2016 quarter, but still well below the RBA’s 2-3% target band.
The CAMA RBA Shadow Board’s conviction that the cash rate should remain at its current level is stronger than two months ago, reflecting the heightened uncertainty surrounding the Trump presidency.
The Shadow Board attaches a 70% probability to a rate hold being the appropriate policy setting.
The confidence attached to a required rate cut equals 5%, while the confidence in a required rate hike equals 25%.
There is little inflationary pressure emanating from the Australian labour market, with Australia’s official unemployment rate now standing at 5.8%.
Since the participation rate has remained steady, the modest increase in unemployment is primarily due to a smaller increase in the creation of new jobs.
There is no new data on wages growth.
The Aussie dollar, relative to the US dollar, has strengthened again, finding support above 75 US¢.
Yields on Australian 10-year government bonds have slipped to 2.77%, once again nearing their historical low.
Domestic share prices have retreated from their highs in early January, the S&amp;P/ASX 200 stock market index now consolidating between 5,600 and 5,700.
The main global threat remains the uncertainty surrounding the Trump Presidency.
On the one hand, Trump’s promise to drastically increase infrastructure and defence spending, coupled with tax cuts, will exert upward pressure on US, and hence world, interest rates.
On the other hand, Trump’s protectionist and nationalist policies will dampen international trade and generate political uncertainty.
This could further increase global interest rates if risk premia were to rise considerably, or lower interest rates if global demand falls.
Making accurate predictions in such an environment is extremely ambitious; but the heightened uncertainty is damaging to financial markets and the overall economic outlook.
Consumer confidence, as measured by the Westpac-Melbourne Institute Consumer Sentiment Index, has fallen slightly during the past two months.
It now stands at 97.4 (down from 101.3 two months ago).
The manufacturing and services PMI, which measure the performances of the manufacturing and services sectors, continue to bounce around without clear direction.
It is now equaling 51.2 (down from 54.2 two months ago) and 54.5 (up from 50.5), respectively.
The AIG Performance of Construction Index (PCI), after its recent blip up, fell again, edged up for the second month in a row, from 45.9 in October to 47 in December.
Building permits declined again in December, by 1.2%, though November saw an interruption in this trend, with an increase of 7.5%.
The Shadow Board’s preference for the optimal interest rate has strengthened.
It now attaches a 70% probability (56% in December) that “no change” is the appropriate policy, a 5% probability (2% in December) that a rate cut is appropriate and a 25% probability (43% in December) that a rate rise, to 1.75% or higher, is appropriate.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50% equals 24%, three percentage points up from the previous round.
The estimated need for an interest rate decrease remains unchanged at 9%, while the need for a rate increase equals 67% (71% in December).
A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 17% (unchanged from December), while the confidence in a required cash rate decrease (7%) and in a required cash rate increase (77%) are also virtually unchanged.
<a href="https://www.propertyobserver.com.au/images/2017/02/07/Screen%20Shot%202017-02-07%20at%2011.37.05%20am.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/02/07/Screen%20Shot%202017-02-07%20at%2011.37.05%20am.jpg" alt="">
For more information, <a href="https://cama.crawford.anu.edu.au/" target="_blank">click here</a>
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j.ballantyne1990-6AQqhLzZaK

February rates are on hold as uncertainty about Trump continues: RBA Shadow Board

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GUEST OBSERVER
After the RBA’s decision in August to cut the cash rate to a historic low of 1.5 percent, there is good reason to pause.
Unemployment fell slightly, but only because of a large increase in part-time employment. With consumer price inflation equalling 1.0 percent year-on-year, well below the RBA’s 2-3 percent target band, and wage growth a modest 2.1 percent year-on-year, there exist little immediate inflationary pressures.
The CAMA RBA Shadow Board clearly believes that the cash rate should not be cut any further. The Shadow Board attaches a 57 percent probability to a rate hold being the appropriate policy setting. The confidence attached to a required rate cut equals a mere 5 percent, while the confidence in a required rate hike equals 38 percent.
Australia’s unemployment rate fell ever so slightly, to 5.7 percent, according to the Australian Bureau of Statistics, as did the participation rate, which stands at 64.88 percent. June’s (revised) increase in full time employment of 44,000, was completely reversed in July.
Furthermore, part-time employment, after falling by 33,200 in June, increased by a whopping 71,590 in July. The overall increase in part-time employment, relative to full-time employment, may be cause for concern. While it may reflect a flexible, nimble labour market, it could also be a sign that the labour market is softening, capturing a degree of underemployment. The seasonally adjusted wage price index increased by 2.1 percent year-on-year in the second quarter of 2016, unchanged from the previous quarter.
For the last month the Aussie dollar, relative to the US dollar, has been range-bound, trading between 75 US¢ and 77 US¢. Yields on Australian 10-year government bonds rarely budged, remaining at their historic lows below 2 percent.
Domestic share prices peaked on 1 August and have retreated slightly since then. Worldwide, after the three-week rally in July, most stocks have been going sideways, confirming the old adage that August is a slow month for the share market.
Absent any major surprises in the world economy, prospects for economic growth in the major economic regions continue to be modest. Jobs growth in the US has been solid in June (292,000) and July (255,000), but predictions for the August statistic, to be announced on 2 September, are smaller. US investment numbers continue to be relatively weak and these are unlikely to improve significantly prior to the US election in November.
Brazil’s economic fortunes, after the recent deposition of its President, Dilma Rousseff, remain highly uncertain. Germany’s fiscal surplus of 1.2 percent of GDP for the first half of 2016 is not matched by the periphery’s economies. The imbalances between Germany and its Eurozone partners will generate further pressure for Germany to increase spending and provide stimulus for the region.
Consumer confidence, as measured by the Westpac-Melbourne Institute Consumer Sentiment Index, rose slightly. The manufacturing PMI, which measures the performance of the manufacturing sector based on surveys of 200 industrial companies, fell dramatically last month, from 56.40 to 46.90, the lowest reading since June 2015. Numbers for this month’s Services PMI have yet to be released. Capacity utilization remains just above 81 percent; after a big gain in June, the AIG Construction Performance Index receded slightly, from 53.2 to 51.6 in July.
The Shadow Board attaches a 57 percent probability (54 percent last month) that “no change” is the appropriate policy, a 5 percent probability (28 v last month) that a rate cut is appropriate and a 38 percent probability (18 percent in the previous month) that a rate rise, to 1.75 percent or higher, is appropriate. The substantial increase in the confidence attached to a rate rise (and the corresponding fall in the probability confidence attached to a rate cut) reflect the Shadow Board’s mild disagreement with the RBA’s decision to cut the cash rate in August.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50 percent is virtually unchanged at 24 percent, one percentage point up from the previous month. The estimated need for an interest rate decrease equals 11 percent (29 percent in August), while the need for a rate increase equals 65 percent (48 percent in August).
A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 18 percent (16 percent in August), while the confidence in a required cash rate decrease equals 10 percent (26 percent in August) and in a required cash rate increase 72 percent (58 percent in August).
<a href="/images/2016/09/06/Screen%20Shot%202016-09-06%20at%2010.31.20%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/09/06/Screen%20Shot%202016-09-06%20at%2010.31.20%20AM.png" alt="">
For more information, <a href="https://cama.crawford.anu.edu.au/rba-shadow-board" target="_blank">click here</a>.
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jchancellor-FAypfDUnLy

No need for rates to go lower after last month’s cut: RBA Shadow Board

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GUEST OBSERVER
After the Reserve Bank of Australia’s cut the cash rate to 1.75 percent in May due to unusually weak inflation, recent figures show GDP growth, in the March quarter, rose to 1.1 percent, higher than expected.
The unemployment rate remained steady at 5.7 percent, while the global economy continues to paint a motley picture. Relative to last month, the CAMA RBA Shadow Board’s policy preferences have become more hawkish; however, this reflects last month’s divergence between its preferred interest rate setting and the RBA’s actual decision. The Shadow Board attaches a 52 percent probability to a rate hold being the appropriate policy setting. The confidence attached to a required rate cut equals 11 percent, while the confidence in a required rate rise equals 37 percent.
Australia’s unemployment rate stood firm at 5.7 percent. The participation rate remained virtually steady at 64.8 percent. Nominal wage growth at 2.1 percent year-on-year is the lowest it has been in 18 years, reflecting slackness in the labour market and a replacement of high-wage jobs in the mining industry with lower paying jobs elsewhere in the economy.
Last month’s rate cut pushed the Aussie dollar four cents lower, relative to the US dollar; it is trading between 72 US¢ and 73 US¢. For the same reason yields on Australian 10-year government bonds have fallen to under 2.3 percent.
Domestic share prices rose to new highs. The S&amp;P/ASX200 last week closed above 5400, the highest since August 2015. Global stocks markets have been similarly buoyant.
Australian GDP growth was unexpectedly high in the first quarter of 2016, clocking in at 1.1 percent, compared to 0.7 percent in the previous quarter. At this rate, annual GDP growth for the 201⅚ fiscal year will equal around a healthy 3 percent.
The US economy is continuing to grow near potential but the most recent unemployment figures disappointed. Other countries are faring less well. Russia is hoping its economy will start growing again later this year while Brazil just announced its economy contracted by 5.4%, year-on-year, in the first quarter. China’s growth rate is expected to be between 6 percent and 7 percent; recent announcements by the Chinese government of large-scale infrastructure projects are no doubt meant to breathe new life into the Chinese economy. Europe’s economies are expanding modestly, Japan is standing still and there remains uncertainty surrounding the resilience and strength of the world’s developing economies, especially those carrying large debt burdens.
Consumer confidence, as measured by the Westpac/Melbourne Institute Consumer Sentiment Index, leapt from 95 in April 2016 to 103 in May. Business confidence, according to the NAB business survey, fell slightly from 6 to 5 in April. The AIG manufacturing index fell slightly, but the services index, also a leading economic indicator, rose.
The Shadow Board’s confidence measures have shifted considerably. It attaches a 52 percent probability (63 percent last month) that “no change” is the appropriate policy, an 11 percent probability (29 percent last month) that a rate cut is appropriate and a 37 percent probability (8 percent in the previous month) that a rate rise, to 2.00 percent or higher, is appropriate.
It must be borne in mind, however, that the Shadow Board, in contrast to the RBA which lowered the cash rate last month, preferred to keep the cash rate on hold in May. Hence, the current probabilities overall reflect a more hawkish stance relative to the RBA.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.75 percent equals 24 percent (29 percent in May). The estimated need for an interest rate decrease has fallen from 29 percent to 16 percent, while the need for a rate increase has risen 18 percentage points to 60 percent. A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 14 percent (19 percent in May), while the confidence in a required cash rate decrease equals 16 percent (19 percent in May) and in a required cash rate increase 70 percent (61 percent in May).
<a href="/images/2016/06/07/Screen%20Shot%202016-06-07%20at%2010.28.31%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/07/Screen%20Shot%202016-06-07%20at%2010.28.31%20AM.png" alt="">
For more information, <a href="https://cama.crawford.anu.edu.au/rba-shadow-board" target="_blank">click here</a>.
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po-LsXgBTHBmX

The nadir of the interest rate cycle is probably reached: RBA Shadow Board

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GUEST OBSERVER
Former Bank of England Governor Sir Mervyn King famously wrote that, “a successful central bank should be boring”.
The recent consensus in monetary policy, given the absence of major news about the Australian and overseas economies to inform policy makers, appears to be just that.
The unemployment rate, according to the latest ABS figures, fell to 5.8 percent, and inflation, at 1.7 percent, remains below the RBA’s target band of 2-3 percent. 
Economic growth came in at an annual 3.0 percent at the end of 2015, fuelled by stronger household spending and government expenditure, while investment declined by 0.6 percent in the fourth quarter, subtracting from GDP growth. Yet real domestic income increased by only 0.1 percent in the fourth quarter, reflecting a decrease in Australia’s terms of trade.
Overall, the outlook for the Australian economy looks much the same as the previous month. The CAMA RBA Shadow Board’s policy preferences remain virtually unchanged from last month. It continues to have a strong preference for keeping the cash rate on hold, attaching a 69% probability to this being the appropriate policy setting. The confidence attached to a required rate cut equals 23%, while the confidence in a required rate hike only equals 8 percent.
The fall in Australia’s unemployment rate can be almost entirely attributed to a fall in the participation rate from 65.1 percent to 64.9 percent. There has been no new data on real wage growth, which remains worryingly subdued.
The weakening of the US dollar has seen the Aussie dollar rebound to above 77 US¢. The trade balance remains firmly in deficit, equalling $2.9 billion in January (down from $3.5 billion in December 2015). Yields on Australian 10-year government bonds have inched up to 2.53 percent. The yield curve thus remains relatively flat.
Global stocks have rebounded spectacularly since the rout at the beginning of this year, while commodity prices have also gained some ground. Conversely, volatility, as measured by the VIX volatility index, has been declining steadily since its peak in early February. The last month has brought little in the way of news about the health of the world economy. The US economy still looks to be the pacemaker, with Europe, Japan, the BRICS countries and other developing economies expanding only modestly. High indebtedness in many countries remains a concern, even at historically low interest rates.
The Shadow Board’s confidence measures are virtually unchanged from the previous month. It attaches a 69 percent probability that “no change” is the appropriate policy, a 23% probability that rate cut is appropriate and an 8% probability that a rate rise, to 2.25 percent or higher, is appropriate.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2 percent remains at 30 percent. The estimated need for an interest rate decrease has risen to 25 percent (23 percent in March), while the need for a rate increase has fallen to 45 percent (47 percent in March). A year out, the Shadow Board members’ confidence that the cash rate should be held steady dropped three percentage points, from 22 percent to 19 percent, while the confidence in a required cash rate decrease equals 18 percent (16 percent in March) and in a required cash rate increase 62 percent (63 percent in March).
To access the comments made by the RBA Shadow board <a href="https://cama.crawford.anu.edu.au/sites/default/files/outcome/attachments/2016-04/shadow_board_comments_april2016.pdf" target="_blank">click here</a>.
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Shadow Board

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