Russia/Ukraine update: adding to existing price pressures
In today’s weekly we review developments of the past week, while also noting the risk of further near-term upside to price prints in Australia, even before Russia’s invasion of Ukraine. These developments will test the RBA’s patience in awaiting a pick-up in wages growth and solidifies our view that the first-rate rise will occur in H2 2022 with every meeting in H2 2022 likely live for initial lift-off.
Our analysis of the Ukraine situation last week highlighted the potential for the conflict to impact commodity markets, especially energy but also including soft commodities given Russia and Ukraine’s large exports of both (see AMW: Ukraine/Russia, implications for economies, central banks and Australia ). Over the past week commodity prices have soared for the front contracts, while higher prices are being priced along the forward curve. Brent oil in particular is up 30% on the week to US$130 a barrel and wheat, thermal coal and gas prices have also surged.
Europe has been more impacted given its direct trade exposure and reliance on Russian energy exports with the EUR falling 3.0% to 1.0881 over the past week. Among the surprises has been the relative strength in the AUD (which usually suffers in periods of risk aversion) no doubt due to Australia’s position as a major net energy exporter. Reports also suggest that sanctions, companies’ self-sanctioning, trade diversion and shipping/freight issues will add further to near-term supply disruptions.
The latter is relevant as in this week’s weekly we look at several high frequency Australian price indicators from the NAB Business Survey and the Melbourne Institute Inflation gauge. Both report a significant lift in input costs and retail prices in recent months, over and above the moves reported in the last six months of 2021. Together with a slew of price increase reports (both ex post and forthcoming) from companies in the latest reporting round, these suggests upside risks to RBA’s near-term Australian CPI forecasts were present even before the Russian invasion of Ukraine.
The week ahead:
Australia: International developments are expected to continue to dominate. That said, the NAB Business Survey for February (survey taken pre-Ukraine) is out, while the Melbourne Institute Consumer Confidence Survey (survey period covers the invasion) will provide a gauge of the impact on confidence. Input cost and retail price measures in the NAB survey will also be worth a look given recent trends in these series. RBA Governor Lowe speaks on Wednesday and attends a panel on Friday.
International: A number of significant international economic events in the week ahead. The US CPI (consensus 7.9% y/y), will provide a further baseline for the markets’ view as to how broad and persistent US inflation pressures are likely to be – and therefore how much work is ahead of the Fed. Later in the week, on Thursday, the ECB meets. Markets will be keen to see the balance presented by the ECB between the negative impact to growth, but further boost to near-term inflation prints.