Poor Australia Retail Sales Data Fuels Rba Rate Cut Bets
Australian retail sales data disappointed for the third consecutive month and momentum has clearly slowed in the past three months. Data released earlier today showed Australia's Feb retail sales came at 0.0% m/m missing expectations for 0.4% and compared to 0.3% in the previous month. On a three month-end annualised basis, retail sales have slowed to just 1.5% in February from 5.4% in November, and are just 3.3% higher y/y in February, the weakest y/y outcome since September 2014.
Momentum softened across a range of sectors in sales. Details showed that growth in both discretionary and non-discretionary spending is softening. Stronger consumption growth is a critical part of pushing overall economic growth back to trend levels. Despite retail trade being a relatively small part of overall consumption, poor data raises doubts about whether the strength seen in Q4 private consumption has been sustained.
The Reserve Bank of Australia is set to meet on Tuesday, 5th April for its monetary policy decision and markets expect the central bank to leave the official cash rate unchanged at its record low of 2.00%. Lower than anticipated store purchases could mean reduced economic growth. A decreased flow of capital within the economy as a result of this can impede on RBA's 2 to 3 percent target range for inflation. This could cause the central bank to react by cutting rates. Poor data definitely keeps a May interest rate cut is on the cards.
AMP Capital’s chief economist, Shane Oliver, is among those who support a rate cut in May. “The main reasons are that mining investment continues to unwind, the contribution to growth from housing looks like it will slow over the year ahead, the RBA will likely need to offset further out-of-cycle bank interest rate hikes, inflation is likely to remain low and in order to help push the Australian dollar back down.” said Shane Oliver.
Australian 2-year government bond yields declined more than 0.8 percent post data release, suggesting that the worse-than-expected figures likely fueled near term RBA rate cut speculation. Overnight index swaps are pricing in at least 1 cut on main lending rate over the next 12 months. AUD/USD saw a 30 pip slump post retail sales data from 0.7668 levels to around 0.7638. The pair hit session lows of 0.7604 and was trading at 0.7617 at 0840 GMT.
"In our view the decision is not going to be as clear cut as it looks at first glance. We believe another key rate cut is a bit more likely as the Australian dollar has appreciated considerably since mid-January. After all, the strong Australian currency would put at risk both for the rise of inflation and the economic recovery in their view. A rate cut that would come as a surprise to most market players, would allow the RBA to weaken the AUD significantly." said Commerzbank in a report.
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