By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Paraphrasing Oscar Wilde, “A cynic knows the price of everything, and the value of nothing.”
And going by the soaring price sub-index, in sharp contrast to the sharp drop in headline US ISM Manufacturing index (and an even steeper fall in ‘New Orders’ sub-component), markets need to be wary of the cynical reflation.
Where prices get too far ahead of less upbeat reality.
Speaking of cynics, it is a field day for any cynic who hears the upbeat professions of the Fed (and to some extent the RBA if it builds on April’s optimism later), yet in the same breath makes allowance to hold on to conviction about allowing the economy to run hot.
Under-whelming PMIs in the EZ was as good as reason as any for cynics of the single currency to extend recent rallies in EUR; and accordingly profit-taking has knocked it back below 1.21.
USD/JPY though more buoyant, is off mid-109 given cynics have dampened UST yields.
USD/SGD is not so much a cynic as it is inspired by USD/JPY to ease back to re-test 1.33.
AUD though takes the limelight to see if an upbeat RBA is trigger enough to lift it back to a test of 0.78 amid elevated commodity prices providing tailwinds. But must watch for cynics!
RBA: Inaction, Not Inflection
Admittedly, the evidence points to the RBA being done with easing, and the next move likely to be a calibrated move to normalisation. But this is some way off. In other words, inaction, while corresponding to faster than expected economic recovery and more resilient job market, is not to be conflated with an imminent policy stance inflection.
Admittedly, the Minutes of April MPC are strewn with signs that the RBA assesses the economy to be on a much stronger recovery than it had earlier envisaged. This is started in no uncertain terms with regards to the strength and speed of the economic upturn in Q3 and Q4, led by resilient household consumption, that has resulted in a much smaller output gap that is set to narrow significantly in 2021.
And the sharp job market recovery with fewer jobs lost compared to the corresponding part of the cycle in previous crises (including GFC).
Finally, far less dire than feared Covid outcomes, especially relatively to other countries, and consequently manageable mobility restraints helping to steady the recovery path is yet another upside surprise in the context of pandemic shock outcomes.
What’s more, infrastructure catch-up post-Covid, led by the massive US infrastructure plan is expected to have both activity and terms of trade positive multiplier effects for Australia.
But a more positive distribution of outcomes is not to be mistaken for the absence of negative risks. For one, the RBA is concerned about subdued wages being despite better than expected employment outcomes and how this is lacks a deeper causal understanding.
In addition, AUD’s climb of almost 2% since April last meeting also highlights the risk of premature tightening of overall monetary conditions.
Finally, while additional A$100bn QE to see through Oct a similar A$5bn per week in bond purchases, extends the initial A$100bn QE expiring in Apr, whether this durably quells volatility in long end yield rippling from USTs is highly uncertain.
And so the RBA cannot conclusively declare the end of balance sheet expansion just yet.
Policy inaction amid significant economic improvement is encouraging, but short of a catalyst for a decisive policy inflection. Especially as the pandemic re-emerges with multiple mutations across the world, casting a long shadow on hopes of unfettered demand recovery.
Nonetheless, barring verbal intervention (or threats of) by the RBA, AUD looks poised to be somewhat buoyed by the upbeat aspects of economic/commodity assessment.
Source: Mizuho Bank Ltd