It’s going to be a big week next week thanks to a combination of the Reserve Bank’s meeting on Monday and Tuesday, the Melbourne Cup on Tuesday and news of the finely balanced US election which will come out during the day on Wednesday Australian time.
A betting person would say RBA governor Michele Bullock and her board will hold their nerve and keep interest rates steady, while in the US the money is now moving in favour of a narrow Donald Trump victory.
While the September quarter figures released on Wednesday confirmed that inflation is coming down, the consensus is that the process still has some distance to go before the RBA feels confident enough to cut the cash rate – which has been steady at 4.35 per cent since December last year.
The good news is that the annual inflation rate has now fallen to within the RBA’s target band of between 2 and 3 per cent, paving the way for a potential rate cut. It’s the first time the headline rate has been inside the band since March 2021. The CPI figures were the lowest annual inflation rate for more than 3½ years.
But the underlying inflation is not coming down by as much as the RBA and others, including federal Treasurer Jim Chalmers, would have hoped.
Bullock has already made it clear the bank will look beyond any short term, one-off measures such as the energy rebate, and will make its decision on the underlying or trimmed mean rate of inflation.
The annual rate of this measure has moved down from 4 to 3.5 per cent, which is still above the target band. Until that comes below 3 per cent, or close to it, Bullock and the board are not expected to move.
Expectations now are that not only will the bank hold the cash rate steady when it meets next week, it will also sit out any change in its last meeting for 2024 in December – and February is now firming as the next possible timing of a rate cut.
The CPI news caused the Commonwealth Bank to push back its expectations for a rate cut until next year, pricing in a 25 percentage point rate cut in February. This means that all four big banks don't expect a cut until next year.
Chalmers sought to argue that it was not just the energy rebates which was behind the drop in inflation, saying that “underlying inflation has come off substantially as well (which) shows broader underlying inflation has come off substantially as well”.
He may be right as the post-Covid inflationary run – sparked by one of the greatest global discontinuities in the post-war period – now seems to be easing globally.
With no cut in rates expected next week, the market will be studying the wording of the board’s announcement for any signs of when the next rate cut might come about, as well as the wording in the Statement on Monetary Policy released at the same time.
But by far the big news will be the outcome of the US election and many Australians are expected to be glued to their screens as the exit polls start to come in. The election is being watched around the world for what it means for the global economy.
Trump is expected to be good for markets, deregulating the economy and easing controls on a range of industries from banking to mining, and energy to regulation of cryptocurrencies.
He has threatened to sack Jerome Powell and put in a new Federal Reserve governor who will do his bidding to cut interest rates faster.
With his promises to cut income and corporate taxes, and cut interest rates and impose tariffs on imports, a Trump presidency could be highly inflationary.
The then president Trump appointed Powell, a registered Republican, to the job in 2017, and Powell took up the role in February 2018. Powell was sworn in on May 23, 2022 for a second term – a role which ends on May 15, 2026.
So Trump could easily bring about a change at the top of the Fed by just waiting a year or so into his presidency.
The US election has major implications for Australia, first through the policies which will be implemented by the new president on a range of areas such as tax, tariffs, regulation, climate change and China, but also for the powerful force which the US has on global thematic debates.
It was Trump’s push to cut corporate taxes that put pressure on Australia to do the same; while the climate change policies of President Joe Biden have also flowed on to Australia.
A Trump presidency could result in some slowing of the global move towards net-zero emissions, and associated policies like the US Inflation Reduction Act which was an inspiration for the Albanese government’s Future Made in Australia policies.
A Harris presidency could be expected to be a continuation of the Biden administration, although her talk of price controls and small business assistance are yet to be fleshed out in any detail.
A simple barometer of global sentiment can be seen in the price of bitcoin which was down to $US81,500 in early September when Harris was ahead in the polls, but has risen ever since to more than $US110,500.
UK bookie Betfair puts Trump ahead of Harris -175 to +175, which is his largest lead since Biden dropped out of the race.
US betting companies are not allowed to accept bets on the presidential race but The Wall Street Journal has reported that four offshore crypto-based betting houses have put $US30m in cryptocurrency on a Trump victory.
But while Trump appears to be ahead, anything can happen in the final days.
At this time in 2016 the polls predicted a comfortable win by Democrat candidate Hillary Clinton.
It would be a brave person who bet their house on a Trump victory but, come Wednesday, there will be a lot of morning-after experts saying: “I told you so.”
Australia can but wait and watch – and be ready for the change when it comes.
As for me, when it comes to the Melbourne Cup next Tuesday, I’m tipping Phar Lap.
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