Australian Markets Weekly: 24 April 2017

Headline CPI picking up in 2017.

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Overview:

  • We get the Q1 inflation reading this Wednesday. NAB looks for a Headline CPI outcome of +0.7% q/q and 2.4% y/y, slightly higher than the market consensus of 0.6% q/q and 2.2% y/y. If this eventuates it would be the first time since September 2014 that headline inflation has been within the RBA’s target band.
  • Core inflation is expected to be 0.5% q/q (market consensus also 0.5% q/q) which annualises to 1.8-1.9% y/y. The RBA is expecting a 0.4% outcome, so our forecast has inflation tracking marginally above the Bank’s forecast.
  • Inflation is likely to continue to track higher in 2017 on the back of higher electricity and gas prices, while vegetable prices are likely to spike in Q2 on the back of crop damage from Cyclone Debbie. Higher headline inflation should also translate into higher core measures. Our models suggest every 1% point y/y increase in headline inflation leads to a 0.2% point y/y increase in core inflation with a two quarter lag.
  • For the RBA, a tick-up in the pace of inflation will for once be encouraging as it should increase confidence inflation will return to target. However, the RBA has also been concerned with the lack of improvement in the labour market with stronger wages growth likely important to sustain a return to the inflation target. March’s bumper jobs figures should help alleviate concerns over the labour market in the short term, but this will be an important area to monitor over coming months. NAB sees the RBA on hold in 2017 and 2018 with the RBA having little appetite to ease policy further given house prices and risks in household balance sheets.
  • Market focus has been centred on the French presidential elections. Centrist Macron and Eurosceptic Le Pen were the top vote getters in the first round on the weekend and Macron is expected to emerge the victor in the second round on May 7. Markets have interpreted the news positively with the Euro gaining the best part of 2% against the US dollar in early trade. President Trump is expected to announce some tax package details mid-week, which should also contribute to a risk positive tone.

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