VIEW: RBC: Greater Focus On Labour Market Upside

RBC note that "the RBA's April minutes contained a number of familiar themes and limited new news. However, while the key paragraph on 3-Year YCC was largely unchanged, the final sentence on considering whether to roll the target bond to the Nov '24s from the current Apr '24s was likely interpreted in the context of the raft of strong labour market data including the various vacancy surveys and business surveys in the last 2 weeks since the board met in early April. This sentence "In considering this issue, members would give close attention to the flow of economic data and the outlook for inflation and employment" takes greater weight in the context of ongoing upside surprise in the suite of labour market related data and a faster decline in slack than the RBA anticipated. Indeed, this meeting and minutes were largely about marking time before the RBA's next updated forecasts in the May SoMP. This will include a likely upgrade in GDP forecasts and lower unemployment rate forecasts all against a stronger global backdrop. In our view, the shifting language around YCC in his March speech lowered the odds of YCC rolling to the Nov '24s to 40%. The data run since then suggest it may have fallen further. Nevertheless, despite the declining slack, we remain a long way from full employment and sustained within target inflation which suggests that ongoing accommodation is still needed especially if the global central banking policy stance errs easy. Accordingly, we still favour QE3 in the A$75-100bn range but the question over size is likely to step up in the coming months as the global taper discussion, especially around the Fed, increases."