Markets Today: Limbo Rock – How low will inflation be?

Limbo Rock is the less famous (and in your scribe’s opinion underrated) hit song by Chubby Checker. No surprises for its inclusion today, with Aussie CPI out at 11.30am and key to the RBA August Board meeting next week.

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Limbo Rock is the less famous (and in your scribe’s opinion underrated) hit song by Chubby Checker. No surprises for its inclusion today, with Aussie CPI out at 11.30am and key to the RBA August Board meeting next week. But first to overnight developments.

A mostly quiet night with no top-tier data, with the exception being the currency markets where most of the action occurred in the Asian time zone. The Yen ranks number one on the G10 leader board, surging 1.1% as markets gyrate on the magnitude of the yet to be unveiled Japanese fiscal and monetary stimulus. Leaks from the papers were disappointing for those looking for a coordinated bazooka — the Nikkei times reported a figure of around ¥6 trillion, while Finance Minister Aso also said monetary policy measures should be left to the BoJ — while Kyodo News indicated all will be unveiled Tuesday. The end result was Japanese equities closed 1.4% lower, while the currency rose.

The Aussie and Kiwi were also higher, with the AUD/USD ending 0.5% higher and the NZD/USD up 0.8%. The Kiwi popped higher supported by solid trade data. For the AUD, there is no clear catalyst, with the Aussie likely being dragged higher, as well as some rumours of squaring up of positions ahead of today’s CPI.

Major equity markets traded in small ranges except for the Nikkei (see above). The S&P500 ended the day unchanged, while the Euro Stoxx rose 0.2%. Profit reporting season was mixed and Apple has just reported better than expected figures as this gets sent out, but markets seem more focused on today’s US Fed meeting decision. There was also a handful of US data releases coming in above expectations (New Home Sales +592k and Consumer Confidence 97.3 v expectations of 96.0).

Bond markets were also fairly muted, with US Treasury yields down 1.2 bps to 1.6%, while German Bunds were slightly higher up 1.4 bps to 0.0%. In the commodities space, the main story remains oil which on the WTI measure fell 0.6% to US$42.88. The main themes there continue with uncertainty over refinery demand with gasoline stockpiles expected to be higher.

Coming Up

Markets will be focused on three events today. The Aussie CPI, followed overnight by UK Q2 GDP and the post meeting statement from the US Fed (4.00am Thursday AEST).

First up Aussie CPI. There’s no doubt that today’s outcome will be the key factor behind whether the RBA cuts rates at the August RBA Board meeting. The market is currently pricing around a 63% chance the RBA cuts rates next week, and the consensus CPI outcome for today is 0.4% q/q for both headline and underlying.

NAB’s modelling of prices and tracking of goods and services indicates a slighter higher than consensus read that points to a close but on hold outcome as far as next week’s RBA meeting is concerned. We expect a headline inflation print of 0.7% q/q, resulting in an annual inflation rate of 1.4% buoyed this quarter by increases in petrol prices, and in fruit and vegetable prices. As for the underlying inflation rate, NAB expects that to average 0.5% q/q. NAB reads the RBA’s May forecast track for underlying inflation as an outcome of 0.4% q/q, so an outcome of around ½% would be a comfortable enough reading for the central bank.

The US Fed meeting announcement tonight will be the other major focus for markets today. While the Fed is likely to keep rates unchanged, the post meeting statement will be closely scrutinised to see whether the Fed is edging towards a rate hike at upcoming meetings given recent Fed commentary. Many of the ambiguities that the Fed cited in the June FOMC Minutes – the labour market and Brexit – have cleared following the stellar June payrolls print and limited spillovers from the Brexit vote on financial markets. Ahead of the meeting, the market prices around 14bps of Fed hikes by year-end.

Finally, UK Q2 GDP is out tonight. While it mostly predates the Brexit vote (it took place 23 June), it is still worth watching to judge the pace of activity pre-Brexit

Overnight

On global stock markets, the S&P 500 was -0.02%. Bond markets saw US 10-years -1.20bp to 1.56%. In commodities, Brent crude oil +0.27% to $44.84, gold+0.1% to $1,320, iron ore +2.1% to $58.08. AUD is at 0.7507 and the range since yesterday 5pm Sydney time is 0.7505 to 0.754.

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