The RBA statement had much more neutral in tone following the anticipated 25bps cut to 2.50%, suggesting they are now happy to sit on their hands for a while. It seems likely that the RBA will cut again, although makes sense that they are not in a rush to signal further cuts in the immediate future.
While none of the recent data has been great, it doesn't suggest that we have fallen over the cliff into very weak or negative growth. For example, while confidence isn't strong, it is consistent with growth remaining at sub-trend levels rather than something worse.
Business confidence in particular is something which the RBA would like to see improve on the back of monetary easing over the last 6 months. In an speech a week before this decision, Governor Stevens stated that "it would be good if there was a bit more confidence in the business community about the future. Unfortunately, it is not a straightforward thing to turn sentiment around."
Labour market outcomes are also not terrible enough for the RBA to be panicked. There are some questions about how useful these data are at the moment, given sample rotation has had a positive skew on employment since the start of the year. Job ads are perhaps more informative, and they have been quite a bit weaker.
But again the rise in the unemployment rate is consistent with sub-trend activity rather than something weaker.
Growth for Q2 looks set to be soggy given the latest retail sales data, which showed no quarterly growth in real terms. With auto sales also flat, consumption looks set to have provided little impulse to GDP in the last quarter.
Patchy GDP growth is nothing new and there is a risk that Q2 is below the recent 2.5% annualised rate. There isn't too much at this stage to suggest that its disastrous, although I would be betting that it would be below current consensus estimates.
Lower interest rates continue to get some traction on interest rate sensitive sectors. Housing finance, for example, continues to climb. This has been slower than in previous cycles, largely because over-leveraged households have been more reluctant to borrow despite low rates. But it is nonetheless climbing, with investor interest quite strong.
This has translated into much stronger medium-density housing construction, which has been driving most of the gains in building approvals. Private sector detached housing has started to pick up a little and the aim of these cuts from the RBA will be for stronger gains in this segment of housing construction.
So for the RBA, the current mix of monetary conditions seems appropriate for the time being given the balance of risks, which will be fleshed out in greater detail in their Quarterly Statement on Monetary Policy later in the week.
But for me, the risks are that there will be more work to do given the balance of risks to the investment outlook in particular. The risk to me is that total investment falls ~10% in the next year, which would take a huge chunk out of growth and employment.
This will make it all the more difficult for other sectors to maintain moment and in all likelihood will mean growth will be softer without further rate cuts.
