Australian Markets Weekly: 6 February 2017

Fed pressure index signalling upside risks for US inflation and interest rates?

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Inflation will rise” – The Fed Pressure Index

  • The Fed Pressure Index is warning of rising inflationary pressures in the US. In the past, the Index has been a good guide to Fed tightening cycles and is signaling increased risk of more than the two US interest rate increases that NAB currently forecasts for 2017.
  • This week, the RBA’s forecasts and February Board meeting are the key Australian events. NAB sees no rate cut in February and also expects the Bank to leave its inflation forecasts unchanged. Governor Lowe’s speech early Thursday evening will also be an important scene setter for markets.
  • There is some debate about whether the RBA’s GDP forecasts will be upgraded or downgraded, given the negative Q3 GDP result, which NAB expects to reverse in Q4 when a circa 1% q/q result is expected.
  • We expect some base-effect downgrading of the Bank’s near-term GDP forecasts, but would not be surprised to see the Bank describe the medium-term outlook a little more favourably due to the higher terms of trade and somewhat improved global outlook.
  • NAB continues to hold a slightly less optimistic view for economic growth for 2018 on account of slower housing construction, a waning contribution to growth from the lower $A and less strength from resource export growth.

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