The Reserve Bank of Australia (RBA) is the sole major central bank that will meet next week but that doesn’t mean the calendar is light, as there’s a cascade of crucial economic data to keep things exciting. The US employment report will reveal whether the recent ‘cracks’ in the labor market were just outliers in an otherwise healthy trend, or early signs of weakness. The answer could determine whether ‘king dollar’ will continue to reign over the FX market. More broadly, risk sentiment will remain sensitive to any virus-related news.
RBA on hold, but dovish guidance likely in store
The RBA has a tough balancing act on its hands when it concludes its policy meeting on Tuesday. On the one hand, recent data have been solid enough to dispel market expectations for an immediate rate cut to support the economy, with the implied probability for such an action currently resting at a lowly 15%. The unemployment rate fell back down to 5.1% in December, retail sales accelerated sharply in November, and inflation picked up in Q4 – even if it remains stubbornly below the RBA’s target range.
However, these are backward-looking data and new risks have emerged. For example, several weeks of raging bushfires across Australia threaten to dampen economic growth. Likewise, the coronavirus epidemic amplifies downside risks for Australia’s economy, not only due to spillover effects from a slowdown in China and falling commodity prices, but also due to the sinister impact this might have on Australia’s tourism industry, which relies heavily on Chinese travelers.
And while the data pulse has improved lately, by no means is it ‘great’. Australian households are among the most indebted in the world, and wages aren’t rising fast enough to ease the debt burden, which is ultimately limiting consumption. Meanwhile, underlying inflation remains stuck in low gear, with little sign of an imminent pick up. The bottom line is that although recent data is good enough to keep the RBA’s hand off the rate-cut button for now, the overall situation suggests the Bank will keep a future rate cut very much on the table.
As for the aussie, even if the RBA doesn’t cut rates this time, the risks around the currency still seem tilted to the downside. The Bank will surely maintain a dovish bias, global risk sentiment remains in the doldrums, and Australia’s close trading ties with China expose its currency to any virus-related weakness in the Chinese economy going forward. Admittedly though, the aussie has already fallen dramatically, so whether or not sellers can break below the 10-year low of 0.6670 in aussie/dollar may be crucial.
The nation’s retail sales for December are also due on Thursday.
Nonfarm payrolls and ISM PMIs might steal the show
In the United States, the upcoming data releases might shape market expectations about whether and how soon the Fed will cut rates again. The week kicks off with the ISM manufacturing PMI for January being released on Monday, ahead of the non-manufacturing index on Wednesday. Forecasts point to an uptick in both figures, though that would still leave the manufacturing print stuck below 50, signaling continued contraction in the sector.
Then on Friday, all eyes will turn to the employment numbers for January. Nonfarm payrolls are expected to clock in at 156k, mildly higher than the 145k in December, and a number consistent with further tightening in the jobs market. The unemployment rate is forecast to hold steady at 3.5%, while average hourly earnings are anticipated to accelerate slightly to 3.0% on a yearly basis, from 2.9% previously.
The US labor market has displayed some signs of stress lately, with real wage growth cooling substantially and job openings as measured by the JOLTS survey declining, which may be an early indication that overall employment growth may be set to slow down. This puts extra emphasis on the upcoming data to eith