For the full details, download the full report: Australian Markets Weekly 29 October 2018

• Predictably, housing, China/trade wars and Australian politics received most focus, while in NZ the key focus was on whether we thought the RBNZ would actually cut interest rates. For the record, our BNZ colleagues do not expect an RBNZ rate cut – and neither do UK/European investors either.
• We presented a continuing positive picture of the Australian economy, with improvements in Mining, Infrastructure and Defence spending countering a moderate slowing in the housing sector. We made the point that a number of commentators and parts of the press are running a very negative view on housing, which is not supported by current developments in prices or activity. This is not to say that a correction in house prices is not occurring in some cities, but that the macro back-drop, which includes low and falling unemployment, suggested a moderate rather than excessive correction, and one that is occurring without a broader downturn in the Australian economy. The RBA will likely have to revise its unemployment forecasts lower in November’s Statement on Monetary Policy.
• While following the US-China trade war closely, clients were interested in the lack of impact on the Australian economy to date, with exports to China and Chinese visitor arrivals at record highs and major Australian export prices and volumes holding up well. The risk remains if the trade war were to broaden to other countries, though there are few signs of this to date.
• For Australian data, it’s a big week, with the focus on the all-important Q3 CPI print on Wednesday. Inflation likely slowed in Q3, reflecting energy rate cuts and government subsidies. NAB and the market expect a headline CPI print of 0.5% q/q implying headline inflation softened to 1.9% y/y from 2.1% in Q2. We see both core measures of CPI lifting 0.3% q/q (mkt: 0.4%) – there seems some residual seasonality that restrains core CPI in Q3.
• After looking like it could test 0.70, the AUD/USD opened this week trading just below 0.71 – the currency rallied on Friday evening after a softer Q3 US GDP print and a pullback in the USD/CNH. Key watch points for the AUD/USD over the week ahead will be local data (Q3 CPI and retail sales) and US data (ISMs, Payrolls and Apple earnings) and month-end portfolio rebalancing flows – potentially more important for the AUD given the scale of this month’s US (and European) equity sell-off. This is seemingly likely to be AUD negative, as asset managers need to buy foreign currencies against AUD to pull hedge ratios back to benchmark.
• For the week ahead, key prints abroad will be EZ CPI (Wednesday), Apple results (Thursday), US ISMs (Thursday) and Payrolls (Friday). Given the recent stock rout, Apple earnings will be particularly interesting – the company represents some 4% of the S&P 500. We’ll also be keeping an eye on geopolitical tensions, as the aftermath of the killing of Jamal Khashoggi continues to make waves.
• Retail sales will likely garner the most interest outside of CPI. It’s likely the data will show the retail sector is still facing headwinds, but we suspect a boost from the release of the latest iPhone provided enough of an offset to see sales growth of 0.4% m/m, with some slight upside risk to this figure. In combination with indicators of modestly higher retail prices in Q3, we expect retail sales volumes rose 0.6% q/q.
• Other data published this week include Building Approvals (Tuesday), Credit (Wednesday) and Trade (Thursday), all of which will provide important reads on the pulse of the economy. From the RBA, Assistant Governor Michelle Bullock (Financial System) speaks on Tuesday at a financial markets conference in Sydney – we’ll be watching for any interesting thoughts on housing and household balance sheets.

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