Australian Markets Weekly: 10 October 2016

The past week has been dominated by bond yields moving higher as have oil prices.

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Rental growth keeps slowing

  • In this Weekly, with Australia’s quarterly CPI two and half weeks away we highlight some recent trends in rental growth. (Rent is a key driver of core inflation in Australia, NAB’s analysis pointing to rents as explaining 25% in the trend of core inflation). Rental growth continues to slow across Australia’s capitals, accentuated by continued declines in the more mining-orientated cities of Perth and Darwin. Rental growth though is also continuing to slow in other capital cities, with deceleration the greatest in areas where new dwelling supply is coming online. Slowing rental growth will continue to put downward pressure on core inflation, posing a challenge for the RBA in returning inflation to the 2-3% target band.
  • In the past week, mostly better than expected US economic data, along with a spate of Fed speeches, has pushed up expectations for a December rate hike to 76% from 56% in late September. A mixed non-farm payrolls report Friday did little to shift those expectations. The unemployment rate did tick up to 5% from 4.9%, and perhaps provides some credence to those more dovish FOMC members who still see “scope for further improvement in the labour market”. Feeding the labour market figures into a policy rule used by Fed Chair Yellen indicates that a December rate hike is justified, but thereafter also a very gradual tightening cycle. Or in the words of Fischer, policy has “little risk of falling behind the curve in the near future”.
  • The other big events dominating markets in the past week have been market gyrations surrounding Deutsche Bank and the US Presidential Election. On Deutsche Bank, an AFP report early last week helped alleviate fears with suggestions that Deutsche Bank and the US Department of Justice were close to agreeing on a $5.4bn settlement. (Recall the US Justice Department’s opening gambit was a fine of $14bn). Those talks continue. As for the US Presidential race, recent audio revelations have seen the odds of a Trump victory decline with fivethirtyeight.com putting the probability of Clinton winning at 81.3% against 18.7% for Trump. The election is on 8 November.
  • It’s a quiet week domestically with the main data points being the NAB Business Survey Tuesday, the W-MI Monthly Consumer Confidence Wednesday, and the RBA Financial Stability Review Friday. Internationally the key watch points will be the US FOMC September Meeting Minutes, China’s International Trade Data Thursday, US Retail Sales Friday, and a speech by Fed Chair Yellen Friday.

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