The RBA is expected to cut interest rates by 50 basis points next week, with a further 25 basis points in June, according to the NAB economics team.
CPI declined to a low annual rate of 2.4% in the first quarter, well within the RBA’s target range. However, the rate jumped to 0.9% (3.6% annualized) in the latest quarter.
While this gives the RBA some leeway, the labor market remains strong, warning of the dangers of cutting too early.
Unemployment is a healthy 4.1%.
Employment continues in a strong uptrend.
The wage price index reversed its recent decline, rising by 3.4% over the past 12 months, while the quarterly rate increased to 0.9% (3.6% annualized), signaling underlying inflationary pressure.
However, monthly hours worked dipped slightly, with the monthly trend falling by 0.1%, warning of a slowdown ahead.
Business confidence is also weak. NAN April business confidence remains below zero, while current business conditions are steadily declining.
Cash flows are suffering, according to the NAB business survey, falling to their lowest level since 2020.
Forward orders have been contracting since 2023.
The slowdown has affected the retail and wholesale industries the most, but mining and transport & utilities show the steepest monthly declines.
Declining capital expenditure warns of an economic contraction and slowing growth ahead.
Conclusion
The Australian economy is gradually slowing, but unemployment remains low, leaving the RBA with a difficult choice: cut rates in anticipation that unemployment will rise, or wait for the actual data? We would argue that they should hold firm while unemployment is low, but that seems to be a minority view.
Acknowledgments
- ABS: Quarterly CPI
- ABS: Labor Report
- ABS: Wage Price Index
- NAB: Forward View – The Calm Before the Storm
- NAB: Monthly Business Survey
- Macrobusiness: RBA lays groundwork for May interest rate cut
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.