Research

RBC Rates Strategy - Much for the RBA to ponder after RBNZ hold fire
Sentiment Indicator : negative
Produced by Thompson, Robert (Royal Bank of Canada - Sydney Branch) on Wednesday, August 18, 2021, 00:01 AM ET
Disseminated on Wednesday, August 18, 2021, 00:23 AM ET
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RBNZ on (reluctant) hold, NSW C-19 outbreak worsens, AU Q2 wage growth softens 

The last 48 hours have brought several dovish developments for the AU/NZ region. A C-19 outbreak in NZ has prompted the RBNZ to hit pause on their plans to
normalize the OCR, while in AU today we saw another fresh high in NSW C-19 cases plus softer than expected Q2 wage growth. Although we still expect the
RBA to press ahead with its planned taper in bond purchases (to be confirmed at the September meeting), the latest developments make the probabilities even
more finely balanced than they were before.

The RBNZ today left rates on hold pointing to the national lockdown and “the serious health and economic risks posed by the virus”. Before
yesterday, the RBNZ had appeared poised to begin normalizing the OCR and markets had been pricing in a greater than 100% chance of a hike (i.e. some
chance of double-barrel move). That quickly turned after yesterday’s announcement of nationwide lockdown in response to a single C-19 case, which has
expanded to at least 5 after overnight testing, and has confirmed to be of the Delta strain. Markets rushed to pare back pricing, but the OIS curve was still over
50% priced for a hike heading into the meeting today and thus the bank holding fire saw NZD & kiwi rates knee-jerk further in response. They’ve since taken
back some of this move though – perhaps because the statement and MPS still read relatively hawkishly with the bank’s published OCR track still implying at
least one hike before the end of this year and plenty more through 2022-2024. Where the May MPS had the OCR at 0.7% by end-2022, the updated August
track is at 1.6%, and similarly for Dec-2023 the track is up from 1.5% to 2.0%. As such, we'd characterise today’s decision as a stay of execution given the
“heightened uncertainty” presented by the developing outbreak. Under the “least regrets” framework, the RBNZ would clearly still like to get back towards
tamping down building inflationary pressures, observing that “activity in most industries now exceeds pre-COVID levels”. Orr’s tone in the subsequent
press conference only reinforced our impression that the RBNZ remain keen to start hiking despite the current C-19 setback.
 
Earlier today, NSW saw another fresh daily high in new C-19 cases of 633 with the Premier again warning that the worst was yet to come given the
number of people active in the community while infectious. There was a lot of discussion at the press conference on R nought or the effective
reproductive rate which is well above 1 (1.3) and driving the continued rise in cases.  It also looks consistent with the data that suggest a doubling every 9-10
days in daily infection rates without new measures to reduce mobility.  The recent step up in measures will not show up in the statistics for another 7-9 days so
the 633 jump today looks consistent with a doubling pattern in the next week (doubling from ~450). Whether it stabilises around 900 depends on how
successful these measures are – with several journalists asking the Premier if further restrictions would prove necessary. In a ray of hope, we note that QLD
has zero community cases today – so it may be that Delta strain outbreaks in AU can still be constrained by early, hard lockdowns.

Also this morning, the AU Q2 wage price index was released, showing wage growth weaker than expected at +0.4% q/q, 1.7% y/y (cons 0.6%/1.9%, RBC
0.5%/1.8%).  Even with base effect, the y/y rate remains subdued.  Public sector wages remain very subdued, lifting just 0.4% q/q with ongoing restraint in this
sector, but private sector wages also missed at 0.5% q/q, the weakest quarterly print since Q3 2020.  There is some evidence of pockets of labour shortages 
and wage pressures in the industry breakdown – skilled shortages are likely contributing to stronger wage growth in professional, scientific and other services  –
but not notable in others such as food services and definitely not broad based.  With some set back to the labour market in the coming months, including our 
expectation of a lift in the UR to ~5.7%, we are a long way from sustained stronger wages growth and especially of the magnitude that the RBA needs to see
(3-3½%) for sustained within target inflation.

Our base case remains that the RBA moves ahead on a slight taper at the September meeting, but the odds of a pause have risen in our
estimation. At the margin, the developments outlined above all put more pressure on the RBA to press “hold” on tapering QE purchases at the September
meeting, rather than scaling them down to $4bn per week as planned. The domestic C-19 picture remains the key risk, especially if it threatens to drag out
weakness beyond Q3 and more into Q4 or early 2022. But the “optics” of the RBNZ choosing not to hike at this meeting are also potentially instructive. If C-19
cases in NSW haven’t yet reached a plateau, and if VIC (or other states) find themselves joining NSW in extended lockdown by the time the RBA meeting rolls
th
around the 7 September, we could see the RBA temporarily step back from its planned taper.

Royal Bank of Canada - Sydney Branch

Robert Thompson (Macro Rates Strategist) | +612 9033 3088 | robert.thompson@rbccm.com

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