Australia Hits Air Pocket as RBA Prepares Verdict on Bonds

(Bloomberg) -- Australia’s relentless recovery struck an air pocket as household sentiment retreated and employment fell for the first time in seven months, which combined with a slow vaccine roll out increases pressure on the central bank to maintain a high tempo of stimulus.

Consumer confidence slid 4.8% in May, though from a record high, and employers cut 30,600 roles in April. Yet other indicators remain positive, a survey showed the financial well-being of Australians climbed to the highest ever and last week’s budget contained new rounds of spending.

The underlying question is how long it will take the Reserve Bank of Australia and Treasury to achieve their goal of pushing unemployment down toward 4% to revive wages and inflation. Governor Philip Lowe is due to decide in July whether to extend the yield target and quantitative easing programs.

Robert Mead of Pacific Investment Management Co. sees the RBA extending its asset purchases framework, but expects policy makers will give themselves more flexibility to adjust the pace.

“Our borders aren’t opening, our migration has stalled, our vaccine rollout is pretty slow,” said Mead, co-head of Asia-Pacific portfolio management. “The data flow is suggesting that there will be hiccups along the way -- hopefully we end up in a much better place economically but it’s not a straight line.”

He sees setbacks in the recovery making Australian bonds look attractive.

The pause in the economy’s upward trajectory coincides with the end of the JobKeeper wage subsidy and bank loan repayment deferals, suggesting a likely period of adjustment ahead. What is clear is wage growth remains tepid.

In the first three months of this year, wages advanced 0.6% from the prior quarter and 1.5% from a year earlier. That’s well below the sustained 3% expansion the RBA is seeking as it tries to return to consumer prices to target.

What Bloomberg Economics Says...

“Patchy economic data is a reminder of the reality that the post-COVID recovery is not likely to be a straight-line affair. Rather than a sign of macro weakness, households’ willingness to take holidays in April -- which cruelled the jobs recovery -- more likely reflects an underlying confidence in labor market prospects.”

-- James McIntyre, economist

The government, in its May 11 budget, announced about A$100 ($78 billion) in extra spending over the four years that will underpin the recovery. The RBA reiterated in minutes of its May meeting that it’s unlikely to raise interest rates before 2024 at the earliest.

Data released Friday showed consumers are still spending, with retail sales advancing 1.1% in April, according to a preliminary estimate, more than twice economists’ median forecast.

Lowe and his board will convene July 6 to decide on rolling over the RBA’s three-year yield target to the November 2024 bond from the current April 2024. They’re also due to decide on whether to undertake a third tranche of QE after A$200 billion of buying ends in September.

“Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia,” the RBA said in the minutes Tuesday.

©2021 Bloomberg L.P.