If we get an upside surprise to the Australian CPI this morning, the potato could be the main culprit. More on that later, first to overnight developments.

Brexit news dominates headlines this morning with the UK Supreme Court ruling Parliament must vote before the formal Brexit mechanism (article 50) can be activated. However, in positive news for Brexiters the court also ruled that the devolved Scottish, Welsh and N. Ireland assemblies do not get a vote on the process. UK Secretary of State for Exiting the EU David Davis said the government would present such legislation “within days” and activation of the formal Brexit processes by the end of March 2017 still looks likely. The pound did experience some intraday volatility, but ended the day down 0.3% and trades some 3.9% higher than its lows in early January at around 1.2514.

As for other currencies, it was a night of mild US dollar strength with the DXY up 0.3%. The rise in the dollar mostly reverses the falls seen after Trump’s Trade Secretary nominee Steven Mnuchin noted an “excessively strong dollar may have negative short-term implications on the economy”. What was not widely reported though was that Mnuchin’s comments were in response to a hypothetical question of a 25% rise in the dollar so no surprises there for the reversal. Most G10 currencies were weaker with the Euro down 0.33%, Yen down 1.02% and Aussie almost unchanged (down just 0.1%). The Kiwi and the CAD outperformed, up 0.2% and 0.62.

Trump news flow continued overnight with focus on protectionist policies and winding back regulations then on boosting infrastructure spending. In a meeting with the CEOs of major car manufacturers, President Trump tweeted “I want new plants to be built here for cars sold here” and vowed to cut regulations and taxes as an incentive, repeating his mantra of “buy American and hire American”. Trump also signed off on some executive orders to help advance the Dakota Access and Keystone XL Pipelines and to expedite environmental reviews for “high priority infrastructure projects”.

Solid European PMIs and a mostly positive company earnings season contributed to higher bond yields overnight. US Treasury yields were up 7.4 bps to 2.47%, German Bunds up 4.5bps to 0.41% and UK Gilts up 3.5 bps to 1.40%.  Australian CGS largely followed the moves in Treasuries the previous night, down 6.3 bps to 2.70%.

Equities were mostly higher on the back of solid earnings from homebuilders and DuPont. The S&P500 rose 0.7% with the Dow Jones also up by 0.7% and building momentum for a second tilt at the psychological 20,000 mark – it currently sits at 19,934. The EuroStoxx was up 0.3% while the FTSE was unchanged overnight. Dragging on the FTSE was a near 20% fall in BT Group on the back of “improper practices” in its Italian arm which saw a £530m write-down.

In commodities, oil was higher, up 1.2% to $53.38 (WTI) while Brent was also up 0.7% to $55.62. Comments by Iraq that it was progressing with its commitment to cut oil production supported. Australia’s key commodity prices were unchanged to higher with Iron ore up 1.9% to 82.9, Thermal coal up 0.1% to 83.8, while Coking coal was unchanged at $185.0.

Coming Up

The main game this morning is Australia’s Q4 CPI, out at 11:30 AEDT. Forecasts for Headline CPI centre on 0.7% q/q, but range from 0.3-1.0%. Strength this quarter is expected to come from petrol prices, housing construction costs, domestic travel and tobacco excise. NAB is closer to the top end this quarter at 0.9% q/q with some of our higher read stemming from indicators that suggest a strong increase in vegetable prices on the back of Australia’s 2^nd wettest winter.

Winter rains were reported to have affected a number of crops with the price of wholesale potatoes surging some 70.9% in the quarter. In your scribe’s opinion, to what extent these wholesale price developments get translated into retail prices will determine whether Headline CPI is at consensus or slightly higher.

On the core measures, NAB is in line with the consensus in looking for a pair of 0.5s. This would put annual growth for the Trimmed mean at 1.7% y/y and the Weighted Median at 1.4% y/y and average out at 1.5% to be broadly in line with the RBA’s November forecasts. Such outcomes are unlikely to sway the RBA. Governor Lowe has expressed a willingness to be patient in getting inflation back to the 2-3% target and the RBA’s own forecasts sees this as only happening by mid-2018.

Internationally it’s a fairly light calendar. Japan has its Trade Balance at 10.50am AEDT, and the German Ifo is out at 8.00pm AEDT. Finally, there is a G20 conference on digitising finance which includes a plethora of central bank speakers, including BoE Governor Carney and Bundesbank President Weidmann with the potential for headlines from any side discussions.

Overnight

On global stock markets, the S&P 500 was +0.73%. Bond markets saw US 10-years +6.44bp to 2.47%. In commodities, Brent crude oil +0.27% to $55.38, gold-0.6% to $1,208, iron ore +1.9% to $82.69, steam coal +0.1% to $83.75, met.coal +0.0% to $185.00. AUD is at 0.7579 and the range since yesterday 5pm Sydney time is 0.7554 to 0.7609.

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• Markets Today: 25 January 2017 (PDF,168kb)

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