Tuesday: RBA expected to hike today

Oil prices edge up and bond yields keep rising, which shunts coal down. The RBA is expected to hike today, and New Zealand's budget deficit forecasts are expected to improve, and Singapore's factories are going gangbusters. That's coming up in our five things and five minutes on Tuesday, September 29th, and then in our dip-dive interview, Ainsed Senior Economist, Mars Workman, Previews, New Zealand's budget update, before a general election on November 7th. New Zealand has relatively low government debt, and we also have a government whether that's a left-leaning government or a right-leaning government that's too tend to stick to relatively prudent fiscal strategies. But first in five and five with Ainsed, the Reserve Bank of Australia is widely expected to hike its cash rate by 25 basis points to 4.6% later today. Ainsed Head of Australian Economics, Adam Boyton, expects the RBA to reiterate how persistent inflation has been in Australia, and that the conflict in the Middle East is adding to inflation pressures. To date, the RBA has tended to view higher energy prices very much through an inflation lens, not a downside growth lens. So their focus will be quite firmly, I think, on the inflation outlook, and it is eyeed to ensure, and I think this will become quite clear in the press conference. It has been mentioned by the RBA governor already in number of times, but it is designed to ensure that inflation expectations don't get stuck at higher levels, and inflation doesn't get embedded here at higher levels above the RBA target. As of 4 AM City Melbourne time, West Texas and immediate futures were up 0.2% at $92.66 a barrel. The S&P 500 was down 0.5%, the Nasdaq down 0.6% and the Dow slipped 0.4%. The US Senior Treasury yield rose another 5.6 basis points to 5.243%, while the 30-year yield rose 6.4 basis points to 5.566%. Those rises in bond yields shunted gold down 3.5% to $4,167.00 an ounce. The US dollar index rose another 0.2% with those higher interest rates. The Australian dollar was flat ahead of the RBA decision at 70.29 US cents, while the Kiwi was up 0.2% at 56.75 US cents. 2. Australian dollar has fallen this month by 2% versus the US dollar, despite firm expectations of the rate hike in Australia today. A&Z FX strategist, Precious Jane, says that weakness was more about the US dollar strength as the market focused on the Fed's own high-class week, a hawkish hike from the RBA may strengthen the Aussie dollar, while a neutral hike is seen more likely to sustain that weaker level against the US dollar, Sue's pressure. We are seeing that if RBA delivers a hike with forward guidance and about further tightening coming in, that would help Aussie dollar to maintain its rally. But if the RBA comes out with neutral guidance and data dependent guidance, the hike is seen as neutral hike and that would sustain AUD's movement. 3. New Zealand's Treasury releases its pre-election fiscal update, or Prefu later today. We'll include fresh economic forecasts, a new forecast for the government's deficit track and an update on its borrowing plans. A&Z's senior economist, Mars Workman, says there has been some improvement in the deficit in recent months, offset by weaker growth. So we're going into this Prefu with a slightly stronger than expected fiscal position. But at the same time, we think that some of the budget's economic forecast assumptions over the medium term were actually a little bit optimistic. So I wouldn't be surprised if the Treasury looked at those and decided, oh, maybe they'll trim medium term growth a little bit, but at the same time they've got to marry that into that stronger than expected fiscal starting point. 4. Back to that recent US dollar strength, Prefu says the markets will be watching US inflation end jobs data later this week, with the potential for strengthening views for more fed rate hikes. We have seen that at this month, the flash PMI's numbers that came out were strong, both on composite manufacturing and services. So and looking ahead, the core PC has been at 3.3% year-on-year for two months. And if there is inflation and it is more than expected, we would see the hawkishness priced in for the fed, going to strengthen more and would help the US dollar. 5. Singapore reported its industrial production rose 14.5% in August from a year ago, more than double the annualized growth seen in July, although it was less than market expectations for 18.3% growth. ANZ's head of Asia research, Kun Go, sees electronics and precision engineering output was rising at around 30% a year. Given the extremely strong Nordx growth numbers in excess of 40%, they suggest that we can expect further strength in industrial production for the rest of this year, which will keep robust GDP growth up and allow Singapore to achieve overall GDP growth in excess of 5% for 2026. This strong growth, however, has not been translating into a pickup in inflation at this stage. Hence, this will allow the MES to maintain their current policy settings when they decide on most repulsing in mid-October. Kun Go there. Now in our deep dive interview, ANZ's senior economist, Mars Workman, previews New Zealand's fiscal update before a general election on November 7th. New Zealand on a relative basis has relatively low government debt, and we also have a government that's whether that's a left-leaning government or a right-leaning government that do tend to stick to relatively prudent fiscal strategies. So that's a positive, I think, in a global backdrop when you've got fiscal sustainability concerns being quite common these days, particularly on some of these larger economies. Of course, there are good reasons why a small open economy like New Zealand should have smaller debt. At the end of the day, we are dependent on global investors to fund that debt, and we are a small and marginal bond market. So if those investors decided they didn't like the look of New Zealand for whatever reason, we became too risky, they could easily exit that market, we're marginal in that sense. So that leaves us vulnerable over the longer run and certainly is a good reason why a small open economy like New Zealand should normal times maintain lower debt than some of these international economies we normally compare ourselves to. So how does New Zealand's borrowing requirement and its budget deficit compare to some others? Yeah, so the forecasts at the budget were for narrowing deficits towards a surplus by the end of the forecast horizon. In fact, at the budget there was a surplus forecast for the year to June 2029, which is two years of surplus theoretically over the forecast horizon. And compared to some economies, the fact that we are even forecasting narrowing deficits is a bit different to some, and the upshot here is, you know, it does depend. I mean, reaching those surpluses certainly does depend on future governments following through with their stated intentions. So right now we have the government that is planning to stick to these operating allowances that it's signaled for future budgets, it are the forecasts also assume that we're not going to get any more nasty economic shocks, and of course we do know shocks do happen. So those surpluses, you know, they are quite still a number of years away, they are obviously vulnerable to developments between now and then. And what sort of borrowing requirement are we expecting? So we've got a central expectation, which is no change in the borrowing program versus budget. But as I alluded to earlier, there is a scenario where the Treasury take that stronger than expected starting position, and also maybe address some of the optimistic assumptions under depending their medium term economic forecasts, and look, in that scenario you would expect a flatter bond issuance profile. So what I mean by that is the starting position alone could see the current year's borrowing program revised a little bit lower, say from $34 billion, maybe to $32 billion, but at the same time, the out years, the June 2029, June 2030 fiscal years, they would be vulnerable to a small increase in the borrowing program. But overall, and over that sort of 27 to 2030 time horizon, you'd expect there to be not a lot of change. So with that election on November 7th, how much of a mate is the government, fiscal policy, being to monetary policy because the Reserve Bank of New Zealand is tightening at the moment? Yes, so from a very broad sense, the fiscal stance is around about neutral right now, and is expected to be very mildly contractionary over the forecast horizon. So in terms of exerting more or less pressure on aggregate demand, I'd characterize fiscal policy as broadly neutral at the moment. And in terms of what the Reserve Bank is trying to do, obviously the Reserve Bank is in the middle of a tightening cycle because they're quite concerned about the inflation surge. And that does also, in a way, tie the hands of any potential fiscal for policy response to the current oil shock. Mars Workman there. I'm Bernard Hickey. That was five and five with ANC for Tuesday, September 29th, catch you tomorrow with the details and analysis from the RBA's expected rate hike, due at 230 Australian time and the pre-election budget update, due at 1 p.m. New Zealand time, which is currently three hours ahead of Australian Eastern Standard Time. This podcast contains general information only, not investment advice. You should obtain advice for your personal circumstances before making any investment decisions. Please view the podcast disclaimer available by your media player or e-mail.