Stephen Miller
Yesterday’s GDP numbers for the June quarter confounded the expectations of economists in registering a reasonably healthy 0.7% increase for the quarter, largely on the back of strength in both private and public final demand. As pleasing as those numbers might have been, they are in the realm of historical curio and will have little bearing on the deliberations of the RBA Board when it meets next Tuesday.
It is certain that the September quarter will see a decline in GDP growth as the ongoing impact of COVID delta variant lockdowns on economic activity are reflected in the numbers. There is some prospect that the December quarter GDP numbers might see a negative as well.
Tuesday’s RBA Board meeting therefore will likely be devoted to an assessment of the magnitude of the impact of the lockdowns and the utility of employing monetary policy tools in mitigating the consequences of those lockdowns.
At its August meeting the RBA Board eschewed any delay to its decision to taper bond purchases from a rate of around $5 billion per week to $4billion that is due to take place this month. In so doing, the Board cited:
- the demonstrated ability of the economy to bounce back quickly once the virus outbreaks are contained
- that the economy had strong growth momentum in the economy
- that there was already significant policy stimulus, both from monetary policy but also recent fiscal responses from the Federal and State and Territory governments
- that any delay to tapering would have its maximum effect at a time when the economy was already recovering, and may not therefore be needed.
One month on, those arguments appear less potent.
Moreover, given that the Governor’s Statement at the conclusion of the August Board meeting emphasised that the RBA would maintain its “flexible” approach to the rate of bond purchases and that “the program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target,” it seems inconceivable that consideration of a delay to tapering would not be on the September meeting agenda.
A further argument for deploying “flexibility” might be that it gives the RBA the opportunity to gauge the Fed’s approach to tapering. Certainly, Chairman Powell has made it clear that tapering is likely to start this year but the timing and quantum of that tapering are yet to be determined and depend very much on how the upcoming labour market evolve, including critically important non-farm payrolls data to be released on Friday (see below).
Also critical to the Fed’s thinking will be its assessment of how the delta variant affects the growth path of the US economy.
In getting colour on the Fed’s thinking, the RBA can better assess what its own tapering plans might have on the value of the AUD exchange rate. As part of the quest to generate tight labour markets and attendant wage and price inflation, the RBA remains motivated to avoid an unwelcome upward movement in the AUD. Any outsized move up in the AUD could well frustrate the task of getting unemployment down and wage growth and inflation up. It seems clear that the RBA has achieved its stated objective of “keeping the AUD lower than it otherwise would have been”. In this context it might be prudent to avoid the risk the unwinding of those benefits by tapering ahead of a clearer view of the Fed’s plans.
Manufacturing ISM slightly stronger than expected. ADP employment disappoints. Coming up: Friday’s September non-farm payrolls critical to September FOMC deliberations.
In his much anticipated virtual appearance at Jackson last Friday, Fed Chair Powell gave his strongest signal yet that the Fed will begin to taper its bond purchases this year declaring that the U.S. economy has met the central bank’s test of “substantial further progress” toward its inflation goal and that it has made “clear progress” on the labour-market front. While Powell stopped short of nominating when the Fed might set out a tapering roadmap, it seems that should the August employment report to be released this Friday come in close to the current consensus of an increase of circa 750k, and with the unemployment rate falling two-tenths to 5.2%, such an announcement could come as early the September 21-22 meeting, although that is still a finely balanced judgement.
The August private payrolls (ADP) data disappointed coming in at 374k versus 613k expected, although that number of late hasn’t always been a good guide to the Bureau of Labor Statistics non-farm payrolls report. Also interesting was the September manufacturing ISM which beat expectations coming in at 59.9 (versus 58.6 expected and 59.5 in August). The employment component, however, showed overall contraction coming in at 49 versus 52.9 in August. The prices paid index fell to a still elevated 79.4 from 85.7, indicating some diminution in the rate of growth of price pressures but still consistent with persistent inflation well above current Fed forecasts and targets.
The data are potentially difficult to interpret as any disappointment in jobs growth may have as much to do with supply-side issues as with any deficiency of demand.
The ISM report noted that businesses reported labour supply constraints which may have accounted for at least some of the employment ‘weakness’. That notion is lent support by both anecdotal reports of stronger wage growth and greater than expected increase in average earnings in recent months, indicating that wage inflation may be taking root in the US.
The average earnings number within the overall non-farm payrolls report will likely therefore be closely watched, with the market expecting an annual increase around 4.0%. If employment growth is lower than expected, but average earnings show an outsized increase relative to that expectation, a September tapering roadmap could still be on the cards.
By Stephen Miller, investment strategist