(bloomberg)

Markets Pull Back on Monetary Policy Expectations after RBA Minutes

• Yesterday, the RBA meeting minutes for November monetary policy decision was released with the board focusing on three big questions for the meeting.
• Why inflation rose more than expected? How the labour market is evolving? And whether monetary policy is actually restrictive.
• The board noted that the September quarter lift was larger than anticipated, highlighting that whilst some of it is temporary pressure there are some components that suggest a more persistent broad pressure.
• Unemployment at the time of meeting, had ticked up, however a strong trend had not occurred and the labour market remains at historically tight levels.
• Looking at forward indicators, there is an indication of some hiring ahead.
• The board judged conditions to be slightly restrictive but believes it’s possible it may no longer be with the above factors “limiting the scope for further monetary easing”.
• Whilst the above line is considerably hawkish, markets still reversed some of previous rates sell off as it took into account that they are not indicating any possibility of a hike.
• This is not surprising when you take into account the sell off in bonds over the last month (see above graph).
• Pricing for the cash rate to stay the same over the next calendar year firmed up considerably with only a 50% chance of hike priced in next June.
• Looking forward, the markets will have a strong focus on inflation and whether some of the upward pressure experience in last quarter is indeed a one off.
• The same is said for the labour market, however already we have had a stronger than expected print this month with unemployment pulling back to 4.30%.
• Today, we have quarterly Wage Price Index were markets are expecting 0.8% QoQ which would mean the annual trend has essentially moved sideways over the last 3 quarters.