Last week’s Capital Expenditure report (CAPEX) was much weaker than expected and provided further evidence that the transition toward investment in the non-mining sectors remains quite some way off. In fact, business estimates for 2015/16 investment intentions were actually downgraded and now suggest that the non-mining businesses are going to cut their expenditure by 10% next year.
The Reserve Bank will be disappointed by this weak result, which provides further confirmation that rates are likely to remain on hold for an extended period or even be cut further. The post-meeting statement issued after the RBA’s Board meeting this Tuesday will be closely monitored to gauge the RBA’s reaction to the CAPEX data. Markets continue to price in the possibility of a rate cut, with around 55% priced in by December and almost 100% priced in by March next year.
The recent fall in the Australian dollar (including a fall of almost three cents last week) to USD0.7659 may just allow the RBA to hold off on any further rate cuts, however if household spending falters, the RBA will need to act once again.
In a survey conducted by AAP Reuters last Friday, all 12 economists surveyed expect the Official Cash Rate to remain steady on Tuesday, but 10 of them are tipping a move (down) by the end of the year.
Inter-bank futures pricing of the Official Cash Rate