AUD - fallout from low wage inflation - Rabobank

"Today’s release of Australia August retail sales data unexpectedly dived -0.6% m/m. This compared with a market median of +0.3% m/m.  In the second quarter, consumer demand in Australia had been showing signs of picking up," note Rabobank analysts.

Key quotes:

"However, this may have been a temporary reaction to the cyclones that hit Queensland in March.   Australian households are currently having to cope with huge increases in utility costs, high levels of debt in addition to very low increases in pay.  In this environment perhaps it was inevitable that consumption had to slow at some point."

"Economists have put forward several reasons for the breakdown in the relationship between higher levels of employment and wage inflation. Demographics and technological change almost certainly have a part to play.  Lower representation by trade unions is probably another factor.  However, there is currently a lack of consensus as to which of these factors are having the greatest sway."

"In Q2 2017, wage inflation in Australia stood at 1.9% y/y for both the trend and the seasonally adjusted measures. According to the Australian Bureau of Statistics “historically low level of growth for both series has been recorded for the last four quarters”.  Meanwhile household debt ratios have been at elevated levels in recent years which is consistent with the rally in house prices.  This has also been contributing to the squeeze on household spending power."

"Last month RBA Governor Lowe stated that the hawkish rhetoric from other central banks ““has no automatic implications for Australia”. Lowe spoke about the weakness in wages, stating that “over the past four years, the increase in average hourly earnings has been the slowest since at least the mid-1960s.”  He said that “this is partly a consequence of the unwinding of the mining boom but there are structural factors at work as well. The slow growth in wages is putting a strain on household budgets and contributing to low rates of inflation”." 

"The outlook for the AUD will continue to take a cue from commodities such as coal and iron and indicators of growth in China. Iron ore prices softened in September on concerns about the outlook for steel demand in China.  Beijing reportedly indicated that it may suspend construction of major public projects during the winter to improve air quality.  This led to concerns about the oversupply of steel.  This factor combined with growing expectations that the RBA will lag other G10 central bank in tightening monetary policy should undermine the outlook for AUD/USD going forward.  We maintain our 12 mth forecast of AUD/USD 0.73."