Overview

• It was a subdued end to last week for markets, oil still high in the aftermath of President Trump reimposing sanctions on Iran. In this context, we note that US production and rig count numbers have continued to rise, production up to 10.7mbpd in the latest week, well above the 2015 peak of 9.6mbpd, but now arriving with steady US crude inventories (see chart below.), testimony to resilient demand.
• The AUD opens this week with a firmer 0.75 handle on the back of US CPI inflation failing to accelerate, leading to a mid-week reversal of USD strength. The USD was pulled from its lows on Friday after a slightly better than expected University of Michigan consumer sentiment reading (unchanged at 98.8 against an expected 98.3) but still ended Friday lower. The VIX index ended last week below 13, the lowest since Australia Day (26 January for international readers), providing some background support to the AUD as have firm resource commodity prices, including iron ore.
• Local markets this week will be firmly focussed on the Australian labour market with the two biggest releases, the Wage Price Index (WPI) for the March quarter out Wednesday and the April Labour Force report on Thursday. Wages growth is at the epicentre of the inflation outlook. Wages growth seems to have troughed at around 2% y/y for the WPI, but how quickly will it rise?
• NAB is expecting a virtually unchanged WPI outcome this quarter, wages growing 0.6% q/q and 2.1% y/y. Private sector wages have grown 0.5% for three quarters and this will be under scrutiny given a somewhat more robust employment market if with only a limited reduction in spare capacity as measured by the unemployment rate. NAB looks for Thursday’s Jobs data to reveal a strong 25K gain in employment and a slight fall in the unemployment rate from 5.5% to 5.4%.
• Also important for the AUD and local interest rate markets will be tomorrow’s speech on the economy from RBA Deputy Governor Debelle and China’s April monthly activity data set.
• The housing sector remains under focus, our special topic for this Weekly. Sydney and Melbourne residential weekly auction clearance rates this past weekend have remained on the lower track evident this year. Sydney cleared a preliminary 62.5% vs. last weekend’s final 63.1% while Melbourne cleared 61.2%, down from 63.7%.
• Resale hedonic residential prices (also from CoreLogic) for the first half of May show prices as essentially flat for the five major State capitals after a decline of 0.3% in April. Year-to housing inflation rates continue to edge lower (more from base effects)
• Other market metrics also point to softness, but of an incremental nature. Sales volumes have been trending lower overall, as have listings, signs that while prices in the major capitals have been less attractive for potential vendors, it’s also likely symptomatic of a market where potential vendors can hold back. Time on the market and vendor discounts have also been rising in some capitals.
• Market participants are also actively discussing the extent to which lending standards might further tighten.

For further details, download the full report: Australian Markets Weekly 14 May 2018

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