CPI suggests RBA will keep powder dry

Emily Nicol
Chris Scicluna

Hong Kong’s markets reopened from the Lunar New Year holiday and inevitably had to play catch up with recent coronavirus-driven stock price falls elsewhere. So, the Hang Seng eventually closed down 2.8%, extending the decline for the year-to-date to 3.6%. But while the number of Chinese coronavirus cases finally overtook the total during the SARS epidemic, yesterday’s improved tone to US markets, and better-than-expected Apple results, helped to give support to other Asian markets. So, while the latest Japanese consumer confidence survey disappointingly showed no improvement in sentiment at the start of the year, the TOPIX rose close to ½% while most of the other regional markets that were open also higher.

In the bond markets, however, some of yesterday’s losses in USTs were reversed in Asian time, e.g. with 10Y yields falling more than 2bps to below 1.64%. And with the yen a touch stronger and oil prices no higher too, JGBs were little changed, with the curve slightly flatter again. However, ACGBs followed yesterday’s moves in USTs by similarly making losses (10Y yields up 6bps to back just above 1.00%) as Australia’s latest inflation data surprised slightly on the upside to support the growing consensus view that the RBA will not cut rates next Tuesday.

European govvies have so far this morning followed moves in USTs, opening stronger despite some slightly improved consumer confidence survey results from Germany and France (more on these and all the other aforementioned data below). But today’s most notable economic figures will come from the US, in the shape of the December advanced goods trade report. And the main event, of course, will be the Fed’s latest announcements. The Fed Funds Target range will inevitably be left unchanged but some technical changes to policy should be expected.

The initial bounce back in consumer confidence in Japan after October’s consumption tax hike was encouraging, with the headline index eventually rising 3½pts over the course of Q4. But today’s survey for January fell short of expectations, with the index moving sideways at 39.1, leaving it still more than 2½pts lower than a year ago and 5½pts below the peak in late-2017. The detail of today’s survey showed that households were more downbeat about their overall livelihoods at the start of the year, with diminished expectations about income growth despite a slight pickup in their confidence about job prospects.

There was, however, a further modest improvement in households’ willingness to buy durable goods for a fourth consecutive month. And that left the relevant index almost 9pts higher than the recent trough. So, while this too remains considerably lower than its level a year earlier, it also suggests that we should see a modest recovery in consumer spending in early 2020. Admittedly, this survey was conducted on 15 January, well before China’s coronavirus outbreak gained greater attention. (In this respect, the first group of Japanese nationals evacuated from Wuhan landed in Tokyo this morning.) So, we might expect February’s survey to suggest greater caution about the near-term outlook and perhaps also therefore a slightly diminished willingness to spend.

Australia’s CPI inflation data for the fourth quarter came in a touch stronger than the Bloomberg consensus, suggesting an increased likelihood that the RBA will leave rates unchanged next week even if the economic case for a cut is still significant. The headline CPI rose 0.7%Q/Q, the most since Q316. That pushed the annual rate up 0.1ppt to 1.8%Y/Y, the highest in a year, nevertheless still 0.1ppt below the RBA’s forecast published in November. Upwards pressure on the quarter came from fruit (6.8%Q/Q, as the drought hit supply), auto fuel (4.4%Q/Q, due to higher oil prices and the weaker Aussie dollar) and tobacco (8.4%Q/Q, due to excise duty). Excluding items with the steepest increases and declines, the trimmed mean rose just 0.4%Q/Q, the same rate as the previous two quarters (and indeed matching five of the six previous quarters) to leave it up 1.6%Y/Y, bang in line with the RBA’s forecast.

Looking ahead, over the near term, the bushfires are likely to add to supply-side price pressures for certain items. But they will also likely push others, such as prices related to tourism, lower. And, from a wider perspective, they are also likely to weigh on economic sentiment, which has seen business and consumer confidence recently hit multi-year lows. With significant question marks hanging over external demand given China’s coronavirus outbreak, economic growth seems likely to remain sub-potential and – despite a drop in the unemployment rate to 5.1%, below the RBA’s forecast, in December – labour market slack seems highly likely to persist. As such, labour earnings growth seems unlikely to accelerate significantly above the recent rates close to 2¼%Y/Y. And the RBA’s view that trimmed mean inflation will remain sub-2%Y/Y – and hence well below target – through to end 2021 should be maintained.

So, while the Bank might have been encouraged by recent retail sales and employment reports, and relieved by today’s inflation data, the case for a rate cut will not go away. There is arguably a respectable case for waiting a little longer to gauge the full macroeconomic consequences of the bushfires and the coronavirus before cutting rates. But, at a minimum, the RBA Board will maintain a clear easing bias when it announces its latest policy decision on Tuesday.

Euro area:
The data flow in the euro area today will be dominated by national economic surveys. The latest GfK survey suggested an improvement in German consumer confidence in the current quarter. January’s headline sentiment indicator was unchanged at 9.7, only 0.1pt above November’s 3½-year low. But it’s forecast to rise 0.2pt to an eight-month in February high. Indeed, the detail for January reported modest improvements in household assessments of economic conditions as well as their income expectations. More significantly, perhaps, it also reported a rise in consumers’ willingness to buy to the highest level in a year.

The latest French INSEE consumer confidence survey was also improved. Having fallen to a six-month low in December, the headline index rose 1.7pts in January to 103.6, still nevertheless a touch below the Q4 average to suggest continued moderate consumer spending growth. While households were the least optimistic about the economic outlook since April, they nevertheless were a touch happier about prospects for their own finances. And they were also therefore slightly more confident about making major purchases. ISTAT Italian economic sentiment indices will be published shortly.

But also of note today will be the euro area bank lending figures for December, which might well show some bounce back from the weakness seen in November, with the annual rate of growth in lending to NFCs having fallen to the softest rate in nineteen months.

Ahead of tomorrow’s BoE policy announcement, today’s releases seem unlikely to play a significant role in the MPC’s discussions. Nevertheless, the BRC shop price index Wednesday further illustrated the continued lack of inflationary pressures on the high street, with prices down 0.3%Y/Y in January. That marked the eighth consecutive monthly year-on-year decline, albeit the softest since July. Food price inflation moved higher in January, up 0.2ppt to 1.6%Y/Y. But against the backdrop of intense competition and as retailers attempted to entice consumers with post-Christmas discounting, non-food prices fell sharply, with the 1%M/M decline leaving the annual rate of growth firmly in negative territory (-1.5%Y/Y) for the eighth consecutive month.

But, after UK Finance figures on Monday showed the highest number of mortgage approvals by the major high street banks for almost 4½ years, today’s Nationwide house price indices for January showed further signs of stabilisation in the housing market at the start of the year. Indeed, the annual pace of house price growth rose ½ppt to 1.9%Y/Y, the firmest rate since October 2018 and above the sub-1% average seen through 2019. But given downside risks to the economic outlook, Nationwide also indicated that it expects house prices to remain broadly flat over the coming year.

Of course, the main event today will be the conclusion of the FOMC meeting. The Fed Funds Rate target range is bound to be left unchanged at 1.50-1.75%. However, the Fed might nudge slightly higher the interest rate on required and excess reserves from the current level of 1.55% to push the Fed Funds Rate back to the middle of the target range. And the Fed will also probably provide more information on its balance sheet policy, including updated plans for bill purchases and repurchase operations. The overall economic assessment of the FOMC might be little changed, with much data having been within the recent ranges and it being far too soon for the Fed to be able to judge with any precision the likely macro impact of the coronavirus.

Data-wise in the US, however, today will bring the advanced goods trade report for December along with inventories figures for the same month. The former is likely to show a larger deficit on the back of higher imports as payback for recent weakness. Despite this, the significant improvement over the prior couple of months is bound to mean that net trade provided a significant boost to GDP growth in Q4. (The initial estimate of Q4 GDP is due tomorrow.)

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