Economic Highlights from Overnight: The next RBA decision looks to be a close on

The next RBA decision looks to be a close one

• AUS trimmed mean CPI comes in lower than forecast and creates an expectation of a cut in February. But will the RBA act?
• FOMC retains its hawkish bias as it keeps rates on hold to begin the year.

Key Highlights

• Next month’s RBA meeting will be a grand spectacle, up there with the recent Boxing Day Test and last week’s NFC Championship game. Okay, maybe that comparison only works if you’re a real sporting buff, but the analogy holds true: this will be a tight call. Yesterday’s consumer price index for the December quarter was an encouraging result and one that definitely makes the February board meeting live… very live. The headline rate came in at +0.2% QoQ (against consensus of +0.3%), which took the yearly figure to +2.4% (+2.5% expected). The trimmed mean measure, which is more representative of how inflation is actually trending, was +0.5% for the quarter and +3.2% over the past 12 months, lower than both market estimates and the RBA’s forecasts. The main drivers of the slowing in trimmed mean inflation was new dwelling prices (-0.2%), which recorded its first quarterly fall since 2Q21, and rents (+0.6%, from +1.6%) as the level of rental assistance increased. According to some economists, these two categories accounted for basically all of the deceleration in trimmed mean CPI. Elsewhere, goods inflation was +0.8% and continues its broad trend lower. Services inflation slowed 0.3ppt to +4.3%, though on an absolute basis, has remained fairly rangebound for the past year. So what to make of all this? Clearly, the event lived up to the hype and it is safer to say that inflation has really opened the door to the RBA beginning its rate cutting cycle. However, the board has stated that it “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” This doesn’t mean just an inflation result per se, but other economic data too, and the labour force is still quite solid. This creates a reason for the board to wait for further data to be “more confident”. As it stands, however, markets are basically fully priced for a cut in February (91.8% chance), and economists are increasingly bringing forward their expectations too (though some have kept their calls for May). It is anyone’s guess.
• The latest Federal Open Market Committee (FOMC) meeting was expected to be a non-event, and it mostly was, as the board left the federal funds rate unchanged at 4.25-4.50% this morning. Still, there were some interesting things to digest, all of which were made evident in the first paragraph of the post-meeting statement. First, the prior phrase that “inflation has made progress towards the Committee’s 2.0% objective” was replaced by “inflation remains somewhat elevated.” And second, reference to a gradually easing labour market and steadily rising unemployment rate was substituted for “the unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid.” These are quite marked shifts in tone, and everyone was in agreeance that the statement reflected another hawkish pause. Some economists, though, were surprised by the manner of the statement, particularly on the price front, given the most recent CPI report renewed hope that progress on inflation is still being made. This was one of the main questions asked at the press conference, and the response was curious, resulting in some reversals back in asset prices. Other than that, the press conference didn’t pull a lot of surprises either, with Fed Chair Powell saying that they do not need to be in a hurry to adjust the policy stance.