Cautious start but solid production report from BHP

The stock market looks set for a cautious open as traders wait on today’s CPI data; further news on renegotiating Greece’s debt facility and this week’ US oil production data.

BHP’s quarterly production report is likely to be seen as a solid outcome by investors. Plans to cut capital expenditure and slow the timing of production increases should be welcomed as a sensible initiative. The move capitalises on past success with this project and will still leave BHP as a very competitive, low cost producer. However, reduced iron ore capital expenditure indicates BHP’s strategic flexibility in the face of changed circumstances and helps reduce risk at the margin.

Underlying measures of CPI are expected to come in at around 2.2-2.3% over the past year. This result should allow the RBA to cut rates further if it judges this appropriate. However, if underlying inflation misses significantly to the downside, inflation data will create a positive incentive for the RBA to cut to avoid the implied upside in real borrowing costs caused by lower than anticipated inflation.

The US oil production data could be a key number for oil and energy stocks this week. With last week’s data showing early signs of a plateau in production, markets will be looking for this to be confirmed to justify the recent jump in oil prices. This creates potential for volatility following release of this data. 

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