October 22, 2018
Australian Markets Weekly: CPI Preview – softer inflation in Q3
This week, we share our thoughts on inflation, with Q3 CPI due to be released in a little over a week on Wednesday 31 October.
- The September quarter tends to see strong headline CPI prints, with quarterly growth of 0.7% and 0.6% in 2016 and 2017, respectively. However, this year NAB expects Q3 Headline CPI grew a softer 0.5% q/q (or 1.9% y/y), while core inflation softened to 0.3% q/q / 1.8% y/y.
- Holding back Q3 inflation have been energy prices and government subsidies. This year, rate resets on 1 July have seen flat or declining energy prices for many customers. Further, government changes to childcare subsidies, and the scrapping of TAFE fees in NSW have weighed on headline CPI. Partially offsetting these impacts were increases in fuel and fresh food prices, the latter driven up by drought conditions on the east coast.
- As a result, while our economic models suggest a headline outcome in the vicinity of 0.6% q/q, the bottom up details point strongly to a forecast of 0.5% q/q for headline CPI, negatives outweighing the positive “one offs”.
- Principal components analysis (that takes in major drivers such as rent) points to an even lower core rate this quarter and we expect core inflation to be 0.3%.
- The AUD/USD opens this week still trading just above 0.71, speculative positioning still very short. The likely loss of the previously-safe seat of Wentworth to independent Kerryn Phelps hasn’t deflected the AUD at the start of the week. With little on the local economic calendar, the AUD this week look set to remain in the hands of broader USD and Emerging Market (EM) moves amid a sparse local calendar. The AUD did make some gains on the crosses last week, a part reflection of its short positioning, but not against the NZD, where positioning is even more extreme.
- Broader USD moves in turn are likely to be heavily dependent on whether EUR/USD can build on Friday’s bounce (Italy’s response to last week’s EU’s ‘please explain’ letter, due Monday (tonight), will be important here, as will the EU’s subsequent reply). It will also be interesting to see whether GBP/USD can extend Friday’s gains that came from news that UK PM May was considering an ‘indefinite’ stay in a Customs Union in order to break the impasse over the Irish border question.
- For the week ahead, geopolitics looks like dominating the international news flow this week and what that does to risk sentiment and oil prices in particular in the aftermath of international outrage over Jamal Khashoggi’s killing. Adding to geopolitics tensions was last week’s US decision to pull out of the 1987 Intermediate Nuclear Forces Treaty and a visit to Moscow by John Bolton, President Trump’s hawkish National Security Adviser.
- It’s a quiet local calendar, RBA Deputy Governor Guy Debelle appearing at three events, but offering “remarks”, presumably then with limited new economy or market content. Globally, US earnings season continues and we get US Q3 GDP on Friday (the Atlanta Fed’s latest GDPNow estimate stands at 3.9%. The Bank of Canada meets Wednesday and is expected to lift rates by 25bps to 1.75%. After Thursday’s ECB meeting, President Draghi’s post meeting press conference will be of interest.
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