Economic Snapshot – May – June 2016
In May we experienced an important realignment of interest rate expectations – both here in Australia and in the USA. Both countries are resisting a change of rates for differing reasons. There has been softer than expected inflation data in Australia leading to a holding strategy on rates whereas the USA had stronger than expected spending data – but is communicating concern about Britain leaving the European Union which in turn has led to a similar hold strategy. All things being equal and assuming Britain remain in Europe the USA is more likely to increase rates. We live in interesting times?
In Australia, the market priced another cut in the cash rate, while in the USA the market brought its short-term expectations for the cash rate more into line with the Federal Reserve’s guidance. These changes in the market’s expectations about interest rates contributed to a modest but renewed depreciation of the $A – which continues to show resilience upside strength beyond expectations.
Economic data for Australia released in May prompted further expectations of lower domestic interest rates. For example, the latest wage price index figures showed hourly rates of pay grew by a mere 0.4% in the March quarter and by 2.1% over the past 12 months. This was the lowest reading in the last 20 years. Economists have noted that this pace of wage inflation is lower than history suggests it should be given where the unemployment rate is at the moment.
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