Finance week ahead: Will a low inflation figure push the RBA closer to a cut?

The big number for the week will most likely be a small one with Australia's already low inflation rate expected to keep tracking down.

The big question the small number prompts is whether it will be low enough to inspire another cut in official interest rates from the Reserve Bank.

Inflation — or lack of it — has been the driving force behind the extraordinary push to negative interest rates and money printing Europe and Japan as well as the slower than expected move in the US to start raising rates.

Last week's minutes from the March RBA board meeting restated the view that low inflation provides scope to cut again should that be required to support faltering demand.

The headline CPI figure (Wednesday) is expected to deliver a quarterly rise of 0.2 per cent, down from 0.4 per cent in the December quarter.

That is largely due to a 13 per cent fall in petrol since the start of the year as well as on-going price deflation in supermarkets, evidence of which was seen in Coles' quarterly sales numbers released last week.

The usual seasonal lift in education and health prices at the start of the year are the big forces acting in the opposite direction.

However the number the Reserve Bank watches like a hawk — or a dove, depending on its mood — is underlying inflation, which excludes volatile items such as petrol and fresh food.

Underlying inflation is forecast to rise 0.5 per cent for the quarter, which translates to an annual rate of 2 per cent.

That is down a notch from the December quarter would be the second lowest reading since 1999 and right at the bottom of the RBA's 2 to 3 per cent target range.

A lower number would clearly raise the chances of a rate cut sooner rather than later.

And that's entirely possible.

Australian dollar rising, but too late for impact

Underlying inflation tends to track labour costs, albeit with a lag.

Unit labour costs barely changed in more than two years, with wage inflation if anything slowing lately.

At the same time the Australian dollar has been rising — probably too late in the quarter to have much of an impact — but if sustained would drive inflation lower as well.

The rising dollar — the trade weighted index is up 5 per cent since February — and falling inflation certainly tightens the RBA's finger on the interest rate cut trigger.

However militating against another cut at the moment is the fact that generally things are not too bad.

Unemployment edged down, job creation is up, and so are commodity prices while GDP growth at 3 per cent is marginally above the RBA's forecast.

The Fed, BoJ and RBNZ to hold again

Over in the US it is pretty much the obverse.

There had been tentative evidence inflation was starting to tick up — although that may have been a false dawn — and the central bank is contemplating raising rates.

However this week's two day meeting of the rate setting committee — the Federal Open Market Committee — will not see a change with growth slowing again and worrying global conditions keeping the FOMC on the sidelines.

There will not be a media conference after the decision (Thursday) this time, so the only clues to FOMC's views will be in its statement and the "dot plot" which gives the committee members' anonymous opinion of where they think interest rates will be at various stages down the track.

The statement is expected to conclude that while employment is getting stronger there is room for improvement and inflation developments will be "monitored closely".

Fed chair Janet Yellen has been forceful in her view that the global economy is a big risk and it will be interesting to see how much weight is given to that view in the statement this time around.

First quarter GDP data will be released the day after and is expected to confirm that US economy has nearly stalled.

After a litany of disappointing numbers recently — soft consumer spending, weak business investment, a drag from inventories and net exports — GDP growth for the quarter is forecast to be a torpid 0.7 per cent or 1 per cent annualised.

It might not hold quite the worldwide fascination of a Fed meeting, but the Reserve Bank of New Zealand meets a few hours after the FOMC wraps up and it too is expected to hold.

And in what is a triple-treat for central bank watchers, the Bank of Japan will trot out its decision a few hours on from the RBNZ, and despite wandering zombie-like in and out of recession, official

Japanese rates are expected to be held at -0.1 per cent.

US markets finish flat

US markets finished fairly flat on Friday night with the Dow edging up 0.1 per cent, S&P500 going nowhere and the NASDAQ dipping 0.8 per cent, dragged down by disappointing results from Microsoft and Alphabet — the company formerly known as Google.

Given the Anzac day commemoration on Monday, these figures will largely be forgotten by the time ASX gets back to work on Tuesday.

The giddy return to favour by commodities — and whether the run is sustainable — is again likely to be a feature for the week.

The ASX 300 resources index has gained more than 20 per cent in two weeks.

BHP Billiton and Rio Tinto are almost 50 per cent on their January lows, while Fortescue is up 150 per cent.

The widely held view by big investment bank analysts is the price rise in iron ore, which is behind the surge, is out of whack with industry fundamentals.

In oil it is a similar story as the failure of the Doha talks and a strike by Kuwaiti workers have come and gone with supply, price and sentiment largely unaffected.

The worry is rather than the commodities finding a bottom and rebalancing their supply and demand dynamics, it is all another great big bubble blowing up.

A report from Bloomberg over the weekend suggests the later scenario, arguing that the commodities market is the "new obsession" for Chinese speculators.

Traders have been hoovering up futures contacts across the board; hard, soft, chemical whatever if it's a commodity, it is a buy on the Shanghai, Dalian and Zhengzhou exchanges.

Bloomberg cited the example of contracts on more than 223 million metric tonnes of rebar steel — used to reinforce concrete — changed hands on one day late last week.

That's more than China's full year production of rebar steel.

It is worth noting rebar prices have risen by almost 60 per cent in China so far this year.

Bloomberg quoted a Shanghai-based analyst at Tebon Securities Zhang Guoyu as saying, "The great ball of China money is moving away from bonds and stocks to commodities."

As usual the "great ball" of money is being bankrolled by increased debt.

And just as leverage accelerates things on the way up, it leads to soul-destroying and rapid falls on the way down.

Investors only need look back as far as last year when the margin lending inspired binge on Chinese equity markets collapsed spectacularly, taking everyone else with them.

Australia

Monday 25/4/16 Anzac Day  
Tuesday 26/4/16    
Wednesday 27/4/16

Inflation

Consumer confidence

Vic state budget

Q1: Headline inflation around 1.7%, core inflation 2% tipped

Weekly measure from ANZ, election talk may have an impact

Brought forward a week

Thursday 28/4/16 RBA speech  
Friday 29/4/16

Producer prices

Private sector credit

Q1: Business inflation measure

Mar: Lending data

Overseas

Monday 25/4/16 US: New home sales Mar: Another solid rise expected, was up 2% in Feb
Tuesday 26/4/16

US: Durable goods orders

US: Home prices

Mar: First reading gives insight into business investment. Down 3% in Feb

Feb: CaseShiller series, rising around 6% yoy

Wednesday 27/4/16

US: Fed Reserve meeting

CH: Industrial profits

UK: GDP

No change – decision due 4 am Thursday AEDT

 

Mar: Grew at annualised pace of 4.7% in Feb

Q1: Preliminary reading or 2.1% forecast

Thursday 28/4/16

US: GDP

 

JP: BoJ meeting

NZ: RBNZ meeting

Q1: Annual growth was a weak 1.4% last time, may slip down to 0.5%

No change

No change after last month's surprise cut

Friday 29/4/16

US: Personal income and spending

EU: Jobs

Mar: Will continue to be fairly flat

 

Mar: Unemployment rate steady at 10.3%

Source: ABC News

 

 

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