The Reserve Bank expects economic growth to dip in the 2017 financial year due to the shock contraction in the third quarter of 2016, but to pick up again in late 2017.
The RBA says growth will be between 1.5 per cent and 2.5 per cent in year to June 30, down 1 percentage point from its November forecast, due to a surprise fall in growth in the September quarter.
The central bank's quarterly Statement on Monetary Policy, released Friday, also said growth will be 2.75 per cent to 3.75 per cent in 2018, down from its previous forecast, on the back of falling consumption growth.
Some other highlights from the statement:
- Overall growth is not expected to be sufficient to generate much of a decline in unemployment rate over forecast period
- Inflation forecasts are little changed from Nov. - RBA expects headline inflation to pick up to 2% in early 2017 and says the increase in underlying inflation is likely to be gradual
- Higher commodity price levels are unlikely to be sustained; Forecasts assume much of the recent increase in terms of trade and commodity prices will be unwound over next couple of years, although the terms of trade are expected to remain above the lows of a year ago
- Forecast for consumption growth scaled back a little to reflect recent data and a view that consumption is unlikely to grow materially faster than income over next couple of years
- RBA noted conditions in established housing market have strengthened further, although there's significant variation across the country
- Indicators point to some pickup in employment growth over 1H of 2017; employment growth is then expected to remain broadly stable over next couple of years, which is slightly lower than the RBA forecast in Nov.
- The RBA provided jobless rate forecasts in its table, predicting the rate to be 5.75% by June and staying between 5-6% over remainder of the forecast period
Our shopping tip for the weekend: stack up on olive oil.
Erratic weather in Spain and Italy, the world's biggest producers, is rippling through global olive oil markets, and it's about to get worse. Prices for extra virgin olive oil in Italy have soared almost one-third since October to €5.75 ($7.90) a kilogram, while Spanish costs jumped about 10 per cent, according to the International Olive Council in Madrid. The forecasters at Mintec in England see room for even further gains.
Nowhere is the surge felt more than Britain. Thanks to the Brexit-induced collapse of the pound, olive oil is the most expensive it's been in at least seven years. Celebrity chef Jamie Oliver is closing six of his Italian restaurants around the country after the currency's crash drove up costs.
Prices have become more volatile because of erratic weather in the past few years, and global production is set to drop about 8 per cent this season, according to Mintec.
Hot, muggy weather in Italy attracted olive fruit flies and helped bacteria to flourish, damaging groves. The nation's production is expected to plunge as much as 50 per cent this season. In Greece, last spring's heat waves are poised to cut output by about one-fourth. Floods in Andalusia, Spain's main growing region, ruined its harvest.
At the same time demand is increasing from China and other emerging markets. Spanish producers have had to drain stockpiles to meet export orders, including to the US.
The International Monetary Fund is urging the RBA to keep rates at ultra-low levels for an extended time until a rise in inflation is "highly secured".
The Washington-based lender said the Reserve Bank needed to hammer home its goal of lifting inflation back to its 2-3 per cent target to avoid falling into the Japanese and European trap of exhausting its interest rate ammunition.
Doing so may mean leaving the official cash rate lower for longer, it said.
Staff commentary by the IMF in its so-called Article IV review of Australia - much of which was foreshadowed in November - says the Reserve Bank should assume that it may take a long time to get inflation back to its medium-term target range.
With core inflation languishing around 1.6 per cent, the IMF is effectively urging the Reserve Bank to fall behind the "curve" - or keep official interest rates low until it's absolutely positive higher price pressures are firmly entrenched across the economy.
Their concerns are underpinned by the fact that weak wages growth - which Treasurer Scott Morrison said today needs to be higher - could lead consumers and businesses into believing inflation will stay lower. That would potentially lead to more interest rate stimulus and ultimately a zero official cash rate.
At 1.5 per cent, the official rate is regarded by economists to be between only two and three quarter-point cuts above what is known as the "zero bound".
Although the fund acknowledged that global rates appear to have turned a corner and are heading higher - a point emphasised by Reserve Bank governor Philip Lowe in a speech in Sydney on Thursday - there was still the likelihood that the official cash rate "may well stay low for some time" in Australia.
Financial markets are pricing in an about 20 per cent chance of a rate cut by September, but that switches to a minute chance seen of a rate hike by early next year.
Shares have opened higher with broad-based gains pushing the benchmark ASX200 index through 5700 points, courtesy of some off-the-cuff remarks by Donald Trump.
In a White House meeting with airline executives, the US President promised a "phenomenal" tax plan, but offered no specifics other than citing the need to a lower tax burden on businesses.
White House spokesman Sean Spicer later told reporters that Trump would unveil a comprehensive tax plan including tax cuts for individuals as well as businesses.
That was enough to fire up investors on Wall Street, which has in turned lifted spirits on the local bourse.
Most of the blue chips are trading higher, led by a 2 per cent rise in BHP.
AGL Energy is extending yesterday's strong gains following a well-received earnings report, rising another 2.5 per cent.
REA Group's numbers, however, aren't convincing investors, who have pushed shares down 1.6 per cent.
Soul Patts has raised its below-market offer for Hunter Hall International by 60 per cent to $1.60 a share, putting it ahead of Pinnacle in the race for founder Peter Hall's 24 per cent stake.
Soul Patts lifted its bid from $1 a share, pricing its sweetened offer higher than rival suitor Pinnacle's $1.50 a share. Pinnacle's offer rises to $2 a share, but only in the event several conditions are met, including winning more than 50 per cent of the register.
Soul Patts already owns 19.9 per cent of Hunter Hall after striking a deal with Mr Hall at $1 a share when he resigned as the chief investment officer of his eponymous funds manager in December.
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RBA governor Philip Lowe gave traders and economists something to focus on in Sydney overnight with a fairly upbeat assessment of the Aussie economy, IG's Chris Weston says:
Inflation is not expected to fall further, while growth is expected to remain around 3%, assisted by a falling headwind from the drop in mining investment. Dr Lowe also argued that growth of 3% is not thematic of an exchange rate that is "too high" and this is true when you plug the key variables into the RBA's own 'fair value' model.
AUD/USD has traded in a range of US$0.7664 to $US0.7611 on the session, although the AUD has seen better days against the JPY and NZD, with AUD/JPY gaining 0.9%, helped by a pickup in positive risk sentiment. The good-will towards the AUD may come into play at 11:30 AEDT, with the RBA set to deliver its Statement on Monetary Policy (SoMP) and is expected take a clever to its growth estimates for end-2016 and mid-2017. Talk on the floors is that the RBA could cut as much as 1ppt off these estimates, with the revision lowered to a range of 1.5% to 2.5%. It seems likely that these figures are what AUD and rates traders will be keying off today.
Keep an eye on China's January trade data (no set time), with a view that the trade surplus should widen to $US48.5 billion. The market usually never really understands how to interpret this data point, or at least if it really affects future growth reads, so I wouldn't be expecting it to cause too much reaction in the markets.
On the equity front, we face a nice pop in Asian equities on open thanks largely to Mr Trump. The market has got fairly excited around commentary to US airline CEO's, such as "we are going to be announcing something over the next two or three weeks that will be phenomenal in terms of tax"; and "we have obsolete airports and drain systems and bad roads". Trump's spokesman Sean Spicer then pushed this notion on further saying Trump's tax rollout is "comprehensive" and will "spur economic growth".
The market loves the idea of tax reform, it has corporate tax cuts in its sights and if Trump can push that along, with a more simplified personal tax regime the US and global equities will find buyers. Of course, we are still waiting for further colour on border tax too, and that is something economists really want to see to make the proposed cuts to corporate tax efficient.
Reserve Bank governor Philip Lowe has predicted some of the Trump administration's economic policies could be good for Australia and the global economy, while warning it could also turn out "very badly" if America retreats from the international order of the world.
In answers to questions following his first public address of the year, opening the A50 forum of leading international fund managers in Sydney, Lowe said the RBA "was in watch and wait mode like everyone else" with the US administration.
"It's very difficult to predict how the new US administration is going to effect economic policies," he said. "It's quite possible that the outcomes are really good. Increased spending on infrastructure, reducing regulation, cutting corporate tax, are things that the G20 have been calling for to stimulate economic growth.
"To some degree that is at the core of President Trump's political message, if that works it could be really good for global growth."
It was these policies that Lowe also urged the federal government in Australia to follow. But he also delivered a blunt economic warning to the audience of policymakers and fund managers.
"It could turn out very badly though if we do see the retreat from the open international order, the US economy would be weaker and the world economy would be weaker," he said.
RBA governor backs company tax cuts
Reserve Bank of Australia governor Philip Lowe says Australia needs to make sure its tax system is "internationally competitive". Vision courtesy ABC News 24.
And this is one of the bright spots in the Murdoch empire: REA Group, the company behind realestate.com.au, said its first-half net profit rose 6 per cent to $121.8 million from $115.3 million in the year-earlier period.
The company, majority owned by News Corp, said total revenue for the six months ended December 31 rose 16 per cent to $337.3 million, driven by an increase in Australian residential business and the inclusion of revenue from the Asia-focused iProperty business it acquired in February 2016.
It has declared a fully franked interim dividend of 40¢ a share, up from 36¢ last year.
News Corp has slipped to a $US219 million quarterly loss on the back of charges related to its decision to close the Presto streaming service and impairments at its Australian newspaper business.
The Rupert Murdoch-led media giant said earnings before interest, tax, depreciation and amortisation (EBITDA) for the December quarter rose to $US325 million from $US280 million a year ago.
The company said the results include a $US310 million writedown of the fixed assets at the Australian newspapers, a $US227 million pre-tax non-cash writedown in the carrying value of it's investment in Foxtel, and a pre-tax gain of $US120 million from the sale of REA Group's European businesses.
The company's news and information business, which includes newspapers such as The Australian as well as the Wall Street Journal and the Times in London, has been suffering from lower advertisements as readers prefer the quick and free news on websites and mobile apps.
Revenue in the business fell nearly 7 per cent to $US1.30 billion in the second quarter, accounting for about 60 per cent of total revenue. News Corp's advertising revenue fell 8.3 per cent to $US748 million.
One bright spot for Rupert Murdoch-controlled company has been its digital real-estate business, where it has enjoyed rapid growth.
News Corp said revenue in the business surged 16.3 per cent in the quarter to $US242 million, in line with analysts' estimate.
Here are the "phenomenal" overnight market highlights:
- SPI futures up 24 points or 0.4% to 5634
- AUD -0.3% to 76.23 US cents
- On Wall St, Dow +0.6%, S&P 500 +0.6%, Nasdaq +0.6%
- In New York, BHP +1.3%; Rio +0.5%
- In Europe, Stoxx 50 +1.2%, FTSE +0.6%, CAC +1.3%, DAX +0.9%
- Spot gold -0.6% to $US1233.81 an ounce
- Brent crude +0.8% to $US55.58 a barrel
- Iron ore +0.4% to $US83.84 a tonne
- Steam coal +0.4% to $US79.75/t, met coal flat at $US164
- LME aluminium +0.1% to $US1850 a tonne
- LME copper -1.2% to $US5822 a tonne
- 10-year bond yield: US2.40%, Germany 0.31%, Greece 7.60%, Australia 2.64%
On the economic agenda for today:
- RBA Statement on Monetary Policy and housing finance data at 11:30am AEDT
- China January trade balance
And stocks to watch:
- REA Group reports first-half earnings
- BHP halts Escondida copper production ahead of a strike; approves $2.2b spending on Gulf of Mexico oil project
- AGL Energy cut to underperform at RBC
- Carsales.com raised to neutral at Evans & Partners
- Henderson Group (reported last night) cut to neutral at Credit Suisse
All it took was a vague promise for a"phenomenal" tax plan.
US stocks rose to records, the dollar jumped and Treasuries fell after President Donald Trump said long-awaited details on promised tax cuts would emerge within weeks,revitalising trades that had begun to show signs of cracking.
The S&P 500 Index surged to an all-time high, with airlines jumping after Trump promised industry executives he'd roll back regulations and announce a "phenomenal" tax plan.
Equities in Europe rallied after solid results from Societe Generale eased concerns about the region's banks. French and Italian bonds gained amid ebbing political risk, while gold backed off its highest level since November.
Trump's comments served as a lifeline to so-called reflation trades that were weakening as the administration expended energy defending immigration orders and threatening to rewrite trade terms while providing scant details on pro-growth policies promised during the campaign.
"That was really the crux of the dollar rally shortly after his election and I think investors are getting really excited about that again."
Equities surging to fresh highs on little more than the promise for details later this month demonstrated how starved investors have been for details on spending increases and tax cuts that should spark growth in the world's largest economy.
Good morning and welcome to the Markets Live blog for Friday.
Your editors today are Jens Meyer and Patrick Commins.
This blog is not intended as investment advice.
Fairfax Media with wires.
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