2019 will very much be a repeat for the RBA as downside risks mount
That has to be the most exciting graph in markets over the past two years. The RBA's monetary policy decision and capacity is virtually a flat line. As we began 2018, markets were talking up chances of a Q4 2018 rate hike by the central bank but as the year progressed those expectations got pushed back to Q1 2019 then Q2 2019 and now some aren't even sure if we will see any rate hikes at all next year.
What makes it worse for the RBA is that there are growing concerns that could manifest in expectations to cut rates instead as their next move.
The RBA had problems with household debt, stagnant inflation and non-existent wage pressures as we began this year. Those were enough to justify why they shouldn't raise rates in 2018.
As we get into 2019, it'll be more of the same story for the Australian central bank:
1) Household debt remains high and consumers are feeling the squeeze
Household savings ratio fell to 2.4%, the lowest since Q4 2007, in the latest Q3 GDP report and the disappointment in the growth figures was particularly exacerbated by a fall in consumption. Spending fell from +0.7% q/q in Q2 to just +0.2% q/q in Q3.
With household debt still at elevated levels and house prices in free fall mode, household wealth is being evaporated and couple that with a low savings ratio, it's showing that the Australian consumer is struggling to keep savings up let alone spend on non-essential items.
2) Inflation is still going nowhere
The trimmed mean CPI reading - RBA's preferred measure of inflation - continues to linger at +1.8% y/y and that sits under the central bank's target band for inflation of between 2% and 3%.
With energy prices slumping heavily in Q4, it's not going to help with boosting inflationary pressures in the near future and that presents a real headache for the RBA as they seek to find some form of lasting inflationary pressures to justify a rate hike.
3) Wages are improving but nowhere near where the RBA wants it to be
A common theme by the RBA this year has been to brush aside the downside risks faced by US-China trade tensions and the high household debt by pointing towards the improving labour market. While tighter labour market conditions has seen wage pressures rising once again, it still isn't anywhere near where the RBA foresees it to stimulate inflationary pressures.
The RBA has maintained that they see wage prices growing by +3.5% y/y to give rise to inflation. The latest reading in Q3 shows that wage prices are only growing by +2.3% y/y. While this area is showing some improvement, it's still a long way to go before it meets the RBA's expectations of generating lasting inflationary pressures in the economy.
4) The housing market is in a downwards spiral
Using CoreLogic's measure as a gauge, median house prices in Australia has fallen in all eleven months the reading has been recorded so far this year. The housing market downfall is something really concerning towards the economic outlook next year as it could threaten further financial strain among consumers and lead to weaker growth.
I don't expect a hard landing or a major crash in housing but we should see some form of bottom being found next year for Australia's housing market and that means it will still be a thorn in the RBA's side as they look for more clues to gauge monetary policy.
What does this mean for the AUD outlook?
The fact of the matter is, most of the worries above has been very much priced in to the Australian dollar by now. AUD/USD has been working its way towards the downside this year and approaches the 0.7000 handle once again, which continues to act as a key psychological barrier.
There is much potential for an upwards bounce in the aussie next year should economic conditions start moving more favourably for the RBA. That will raise confidence for a rate hike to come eventually but in my view, I still see the RBA staying pat for yet another year at least.
But the real risk is that things start to fall apart whereby we see inflation heading lower, US-China trade tensions remain unresolved, consumption drags growth lower, and the housing market continues to bottom out.
Markets have priced in a certain amount of worries for the Australian economy but a doomsday scenario like what is described above is yet to be factored in at this juncture. But as more and more data supports that case, expect the aussie to be one of the underperformers once again next year.
The aussie may be having a decent day today but in 2018, it has been the worst performing major currency by a margin:
Major currencies spot returns vs USD in 2018 so far
