October 26, 2016

Markets Today: Fresh Fruit

Seven years on from their 1974 classic ‘Whiter Shade of Pale’, Procol Harem’s light-hearted ode to the health benefits of fruit is set for a test today. Healthy on the body fruit may be, but possibly not on the hip pocket in Q3 according to our economists.

Seven years on from their 1974 classic ‘Whiter Shade of Pale’, Procol Harem’s light-hearted ode to the health benefits of fruit is set for a test today.  Healthy on the body fruit may be, but possibly not on the hip pocket in Q3 according to our economists.  If we get an upside surprise in headline inflation this morning, fresh fruit prices are likely to be the main culprit. See ‘Coming Up’ for more.

In overnight markets, we’ve seen the US stock market’s crown slipping a little largely thanks to lower oil hitting the energy and materials sectors (crude is off just under $1). Consumer discretionary stocks are down even more and which may owe something to the disappointing consumer conference reading. The Conference Board’s version fell to 98.6 from a downward revised 103.5, against expectations for much smaller fall to 101.5.  Evidence of pre-election inertia perhaps? The S&P is closing down 0.3%.

In currencies, it’s the Aussie dollar (up) and Sterling (down) that are the standouts.  After yesterday’s ‘limit up’ move on the Dalian futures exchange, the benchmark China iron ore import price has jumped $2.68 to $61.96, its highest since late August. Steaming coal also pushed ahead, up another $2 and while coking coal didn’t trade Tuesday, it added $4.50 on Monday. Terms of trade tailwinds thus continue to support the AUD on the crosses, at the same time that general US dollar strength is limiting gains versus the USD.

GBP/USD meanwhile has – with the exclusion of the 7 October ‘flash crash’ session – made new post-referendum low at $1.2083, only pulling back late in the London session after BoE Governor Mark Carney said there were limits to the extent to which the Bank could look though higher – GBP induced – inflation.  A further rate cut from the BoE before year end is now quite unlikely in NAB’s view. Sterling’s recovery brought the USD off its earlier highs and which had seen the narrow DXY index trade to within 0.7% of its 29 January YTD highs.

Coming Up

Both interest rate and currency market traders will be sitting on their hands this morning pending the 11:30 AEDST Q3 CPI release.

There is as you would expect much greater disparity of views on the headline CPI read than the underlying measures. From a policy perspective it is the underlying (trimmed mean and weighted median) numbers that are   the more significant, though the headline rate is also important – not least from the perspective of inflation expectations.  It is after all  low headline readings in recent years, albeit driven in no small part by the collapse in oil prices, that have played a significant role in driving inflation expectations down to such low levels and to the chagrin of policy makers.

Forecast for headline CPI centre on 0.5% but range from 0.2% (which would match last week’s equivalent New Zealand print) and 0.9%. NAB is closer to the top end (0.8%) with strength seen derived from fresh fruit and vegetable prices (mostly fruit) higher housing construction costs, higher electricity and gas  prices for customers on the eastern seaboard and also the indexation of alcohol and tobacco which may have added a bit more to CPI last quarter than in Q3 2015.

On the core measures, the range of market estimates is much narrower (0.3%-0.5% for both) and NAB is in line with the consensus looking for a pair of 0.4s.  This would put annual growth of 1.6% up from 1.5% in Q2 and wouldn’t necessitate any change (or perhaps even a slight uplift) to the RBA’s forecasts (see Chart of the Day).

When it comes to inflation data, second decimal places can count, as we’ve experienced with US CPI data of late. The mean of market forecasts for the trimmed mean measure is 0.42% and for the weighted median 0.43%. This means that a 0.5% print for one or both core measures will be less of a surprise than 0.3%. We’d judge that on 0.3% for the average of the two measures, markets will shift pricing for a November cut up to around 25% and at 0.2% to perhaps 50%.   0.5% – or even 0.4% – and it will be time to ‘chill out’ until at least next February (as Glenn Stevens famously told markets in November 2015).


On global stock markets, the S&P 500 was -0.24%. Bond markets saw US 10-years -0.87bp to 1.76%. In commodities, Brent crude oil -1.63% to $50.62, gold+1.0% to $1,274, iron ore +4.5% to $61.96. AUD is at 0.7648 and the range since yesterday 5pm Sydney time is 0.7618 to 0.7653.

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