Scoreboard: Inflation anticipation

The week's market movers include US earnings reports and domestic inflation figures. Low inflation could prompt another rate cut.

The price action on Friday was relatively subdued – equities were effectively flat and there really wasn’t much action elsewhere either. Bond yields were down a bit, commodities up a bit and the Australian dollar little changed at 0.9183.

More than anything, that lack of action simply reflects the absence of any information on the two market concerns of the moment: China’s impending crash and a QE tapering in the US. Although, equity markets aren’t that concerned, because neither of those factors is stopping stocks from pushing new records. Well, except in Australia that is, where many of our big business leaders are too busy cowering in fear and trying to manipulate macro policy rather than actually investing in their businesses. So we wait.

Can’t say that we’re going to learn much this week on either of those big ticket issues and in fact the news flow, or at least the market discussion, will likely be dominated by the domestic inflation numbers (Wednesday 1130 AEST). The consensus is that inflation moderated a bit in the quarter, rising 0.5 per cent on the headline and cores, which would keep those measures around the mid-point (2.5 per cent) of the inflation target (2-3 per cent). Any weakness in inflation would almost certainly be met with a rate cut at some point. I don’t think there is any doubt about that and indeed the market expectation is that the Reserve Bank will cut at least once more.

Remarkably, we also know that any lift in inflation from the mid-point to the top of the RBA’s band (and beyond?) would also not stand in the way of another rate cut. How do we know this? Because quite simply they said so. You can’t get much clearer than that.

With that in mind it’s fair to say that there isn’t much riding on this data. It’s not like the RBA board is waiting for it before determining policy or anything. A rate cut at some point seems to be a given then.

So what are they waiting for then? Who knows. Some suggest that the Aussie has fallen too far and that could of course be entirely plausible – we don’t know what the policy target is now. My view, which isn’t too dissimilar, is that the board, or some members at least, is perhaps a little concerned by the speed at which the dollar has fallen. If it’s too quick it’s destabilising. So while there are some rate cutting loons on the board at the moment, at least some sense of sensibility has crept in. Hopefully rates will be on hold for some months as this will do much to lift confidence.

The key inflation component I think will be the tradable figures. Non-tradable or domestically sourced inflation hasn’t come down much at all – indeed recently it has accelerated. The only thing keeping total inflation within target are the tradable items – those goods and services whose prices are set globally or influenced by the exchange rate.

Outside of domestic inflation and policy issues, the likely bigger influence this week will be US earnings reports, with nearly 160 companies reporting this week. Outside of that the data includes key housing sales figures (new and existing home sales) and house prices. There is less debate on the US economy now so I’m not sure how market moving this data will be. The economy is clearly gaining momentum from what were trendish rates of growth – it’s doing very well overall. Against that backdrop, the housing data and durable goods orders, we’re not likely to see anything view-changing for anyone.

Outside of the US data the key releases include global manufacturing indicators – Chinese manufacturing PMI, the German IFO survey, European PMIs and a UK GDP print. The number of manufacturing indicators suggests we could see the usual headlines about a global manufacturing slump – it’s all soft and has been for a long while, or so says the German IFO survey. I guess what I’m saying is that they are bearish influences on the market and that’s not going to change this week. Thankfully, they’re not normally sufficient by themselves to dictate the price action.


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