Urban Land and Housing – Outlook – RBA to hike – whether June or July too close to call. US bond yields too low.

The above was an interesting heading of the NAB weekly outlook for this week. This could be more good news for property owners with a potential delay (or maybe no) interest rate rise on the horizon.

I have copied the extract below for information

The RBA’s new forecasts released last Friday, where underlying inflation was projected to breach the top ofa near term rate hike is imminent: Plainly, theInd decimal place from 4.92% to 4.85%,

their 2-3% target band in the out-years, made it clear that

best chance the RBA have of staying within their 2-3% inflation target is to aim at the middle.

expect neither Tuesday’s Commonwealth Budget nor today’s labour force survey has changed the RBA’s

view that they need to move soon – how soon still remains debateable.

Tuesday’s fairly lax Budget was in essence neutral for the RBA – they expected it. Same goes for today’s

labour force data, where while the surprise 22k fall in employment looks soft at face value, and saw the

market shave the odds of near term hikes, a broader take suggests the result was neutral. This wider take is

that the unemployment rate was steady at 4.9% (it actually fell in the 2

although I wouldn’t read too much into that), meanwhile there may be some seasonal issues with the

employment change due to ANZAC day colliding with Easter. Finally, sampling errors in this survey are very

large and for that reason I pretty much ignore the month to month employment change in favour of the more

reliable unemployment rate- total employment has a standard error of 27k.

All up, the RBA have already made their economic case for a pre-emptive hike. Whether it is June or July,

though, remains too hard to call. A June 7 hike does have some awkward messaging, as it would come

after a probable negative Q1 GDP result on June 1. Additionally, while I am discounting the headline drop in

employment in today’s April labour force report, I accept it compounds the messaging issue. For now I see

a June 7 hike as a 50:50 call but a hike by July 5 well north of 50:50. Tuesday’s minutes from the May RBA

Board meeting will likely shed more light on how close a hike is. Q1 wages next Wednesday also relevant.

The market shaved the odds of a June 7 RBA hike after today’s labour force report, with cash rate futures

now reflecting a 12% chance of a June 7 hike, a 36% chance of a hike by July 7, and a 64% chance of a

hike by August 2. The July IB contract looks the best selling to me as you get two RBA meetings priced at

less than 50:50. I’ve added this trade to my recommendation sheet.