Market Strategist Evan Lucas explores incoming inflation data and the RBA's conundrum.
Today marks the beginning of one of the busiest periods for the market in the calendar year.
US earnings season hits its highest point with the most amount of releases of the season due out on Thursday, Europe and the UK also peak in the earnings space, and Australia joins the reporting season with first-half numbers for financial year 2018.
The next chapter
On the macro front, this week marks the start of a massive February – it will be the first meeting of the calendar year for most central banks. This week sees the US Federal Reserve meeting for the first time this year, and, although it is not a scheduled press conference (no change to the Fed funds target rate), it is the final meeting for incumbent Chair Janet Yellen.
Her tenure has been one of good communication and differing policy stances, having picked up from previous Chair Ben Bernanke's quantitative easing (QE) program. She took over at the beginning of the unwinding of QE, to embark on a period of quantitative tightening (QT), and to oversee the first rate rises in the post-GFC era.
Market watchers may await a ‘sign-off' piece from Yellen defending her handling of events during her tenure. Personally, I will miss her at the helm, as her steady hand has guided markets through a particularly eventful period. However, markets always look forward and therefore will eagerly await statements from incoming Chair Jerome Powell more than anything. This meeting is retrospective, being from a previous administration.
Inflation drops incoming
Moving to the data releases and fourth quarter 2017 GDP numbers also get released around this point in the year, being 30-35 days since the quarter's end. The US was last week, and Europe is this week – is the renaissance under way? That is the biggest question in the synchronised global growth story.
On the topic of quarterly releases, Europe and Australia both see the release of their respective Q4 inflation numbers. Australia's inflation on Wednesday is of particular interest from a monetary policy perspective considering its relation to the Reserve Bank's core mandate.
The topic of rate hikes in developed markets was raised in Davos, Switzerland, last week, and for most of the second half of 2017 for that matter. There is a suggestion that G10 central banks, in particular, could synchronise rate increases in 2018 – the RBA being one of these banks.
In my view, this won't be the case, but Australian CPI out on Wednesday may give more perspective.
Below is a chart of Australia's core inflation reads dating back to December 2012.
The blue shaded area represents the RBA's target band for trimmed mean inflation, and the yellow line is the seasonally adjusted CPI figures, which are heavily influenced by fresh produce and energy. This is why the RBA likes to strip these out and concentrate on the trimmed mean figures, or the blue line.
As the chart shows, trimmed mean inflation has not crossed into the band since the final quarter of 2015 and flat lined for the previous three quarters. The RBA's core mandate is to maintain inflation between 2-3 per cent, which seems a key reason why the RBA wouldn't lift rates. Domestic and global growth factors miss the point of what the RBA (and most central banks, for that matter) actually do – and that is to maintain inflation.
One could even make an argument that rates could be lower considering inflation isn't materialising. But, this is where we must factor in housing and growth, as it would overheat these areas. Therefore, Wednesday's release will be highly influential in forecasting the future direction of core inflation. Considering the last Statement of Monetary Policy (SoMP) forecasted core CPI to reach 1.75 per cent by December, another flat line read would confirm inflation remains benign and the RBA can continue to ‘warm' the fence as it has been doing for the past 17 months and counting.
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