Australian inflation remains low in Q3

Chris Scicluna

US equity futures continue weaker on rising coronavirus concerns
Despite a rebound in technology stocks, the S&P500 closed down 0.3% on Tuesday, adding to Monday’s heavy losses. The risk-off environment was also reflected in a rise in the VIX to levels last seen in early September and a further rally in the Treasury market. The US dollar experienced a rollercoaster session, but was ultimately little changed. And since Wall Street’s close US equity futures have taken a further leg lower, with S&P minis down 0.9% as we write. This has been accompanied by additional gains in the Treasury markets – the 10Y yield dipping close to 0.75%, some 10bps lower than its level reached last Friday – and a rebound in the US dollar.

The key driver appears to be the steady stream of very worrying coronavirus headlines and the creeping realisation of what this likely means for the longevity of the present economic recovery. Indeed, in an address to the nation this evening Macron is expected to announce a significant new French lockdown albeit likely with greater flexibility than that implemented during the first wave in March (see below), while Merkel will today meet German state premiers to gain their endorsement for one-month closure of restaurants, bars and leisure facilities. At the same time, the continued stalemate in US fiscal stimulus negotiations doesn’t help matters nor does the FBI and DoJ announcement that they would hold a virtual press conference at 11am EST today on a national security matter concerning China.

Given that background, and the absence of significant local news, most equity markets in the Asia-Pacific region initially faced additional downward pressure today. However, the region seemed to gradually gain some support from China, where the CSI300 rallied 0.8% in the wake of the PBoC’s late Tuesday announcement that it had asked banks to stop applying the so-called ‘countercyclical factor’ in their daily yuan fixing submissions – a factor first applied in May 2017 to provide support to the yuan. The removal of that black-box factor gives the PBoC less scope to influence the reference point for the yuan’s allowable 2% daily range, which will now depend primarily on the previous day’s closing price and overnight moves in other major currencies.

In Japan, after being down as much as 0.9% at one point, the Topix closed down 0.3%. Ahead of tomorrow’s BoJ announcements – which will leave policy unchanged but see downwards revisions made to the Policy Board’s forecasts – Yomiuri reported that the Government would soon announce an extension of its “Go-to-Travel’ campaign beyond January, in an attempt to further boost the struggling travel and hospitality sector. However, exporters were not helped by the yen’s march towards ¥/$104. Markets were also slightly weaker in Hong Kong, Singapore and Taiwan, whereas markets in South Korea reversed early losses to close in the black. Meanwhile, after falling heavily yesterday, Australian equities also edged higher and yields on ACGBs moved lower with a small upside surprise in the Q3 CPI report viewed appropriately as no barrier to further RBA policy easing at next week’s Board meeting.

Australian inflation remains low in Q3, greenlighting RBA easing next week
The focus in Australia today was on the CPI report for Q3. After plunging 1.9%Q/Q in Q2 – largely reflecting a combination of the temporary free child care programmes introduced during the nationwide lockdown and the plunge in fuel prices – consumer prices rebounded 1.6%Q/Q in Q3. This outcome was 0.1ppt firmer than market expectations and lifted the annual inflation rate to 0.7%Y/Y from -0.3%Y/Y previously. As expected the key driver was the end of free child care on 13 July, which contributed 0.9ppt to the quarterly increase in the CPI. A 9.4%Q/Q rebound in automotive fuel prices contributed a further 0.3ppt to the outcome. Other positive contributors included a 3.2%Q/Q lift in tobacco prices (due to excise indexation), a 2.5%Q/Q rebound in motor vehicle prices and price increases of 6.4%Q/Q and 5.3%Q/Q for furniture and household appliances, respectively.

As usual, the best indication of underlying inflation pressure was provided by the analytical measures. The trimmed mean increased 0.4%Q/Q – 0.1ppt above market expectations – leaving annual trimmed mean inflation steady at 1.2%Y/Y. The weighted median rose 0.3%Q/Q – in line with market expectations – leaving annual weighted median inflation steady at 1.3%Y/Y. So, on these measures, underlying inflation remains beneath the RBA’s 2-3% inflation target regardless of whether one annualizes the latest quarterly outcomes or looks at the annual movements. Indeed, the average of these annual movements has been beneath the target range since Q116 and beneath the target midpoint since Q414. The CPI ex-food and energy – the core measure calculated and followed in many countries – increased 1.6%Q/Q in Q3 but was still up just 0.9%Y/Y.

With the unemployment rate sitting well above levels consistent with the full-employment aspect of the RBA’s mandate, today’s inflation news provides a clear green light for the RBA to implement further policy easing at next week’s Board meeting. We continue to look for a 15bps cut in the Bank’s cash rate and 3-year bond rate targets (to 0.1%) and the announcement of a bond-purchase programme targeting longer-term assets (5 to 10-years) – the latter initiative designed primarily to lower the Aussie dollar.

French consumer sentiment slightly softer ahead of Macron address to nation
Ahead of tomorrow’s ECB policy meeting, where the intensification of the pandemic and its economic consequences will be at the top of the list of policymakers’ concerns, the main event today will be French President Macron’s address to the nation – at 8pm CET – when he is expected to announce significant new lockdown measures to be implemented from midnight tomorrow. Certainly, despite the curfews in major cities from 9pm to 6am every day, the spread of the pandemic currently appears most severe in France, where 523 deaths, the most since April, were reported yesterday. Reports suggest that restrictions will be slightly more flexible than the previous two-month shutdown imposed during the first wave. For example, schools might be allowed to stay open. But options discussed include earlier curfews, the prevention of people leaving their homes at weekends, and the closure of all non-essential shops.

Given the intensification of the spread of Covid-19 in France, the ECB might be relieved to see this morning’s results of the latest French consumer confidence survey. Strikingly, the headline sentiment indicator dropped just 1pt in October back to 94, matching the levels in July and August and thus still 2pts above May’s low, albeit still firmly below the long-run average (100). Within the detail, the survey did flag slight worsening in consumers’ expectations for their future financial situation and standard of living, as well as a modest increase in concerns about unemployment. But the proportion of households judging it is an appropriate time to make major purchases was unchanged from September and well above levels registered during the pandemic first wave.

Survey points to modest easing of deflation pressures on the UK high street
Following yesterday’s weak CBI survey, today’s BRC shop price survey suggested that deflationary pressures remain prevalent on the UK high street, albeit not quite a pernicious as recent months. Indeed, the survey’s measure of inflation rose 0.4ppt to -1.2%Y/Y, the highest since lockdown in March. Food inflation on the BRC measure remained unchanged at September’s eight-month low of 1.2%Y/Y. But the pace of decline in non-food prices eased 0.5ppt to -2.7%Y/Y, still nevertheless firmly below level’s prevailing before the pandemic struck.

Final clues on US growth due today ahead of tomorrow’s Q3 GDP report
Yesterday’s economic news from the US was somewhat mixed. On the one hand, durable goods orders rose more than expected – with core capex orders rising for a fifth straight month in September – and the Richmond’s Fed’s manufacturing index unexpectedly increased to a record high in October. On the other, while the Conference Board’s consumer survey pointed to an improvement in respondents’ perception of current conditions, a little ominously the expectations index weakened as respondents adopted a gloomier outlook for the labour market.

Today’s key US economic releases are the advance goods trade and distribution sector inventory reports for September, which will allow analysts to further tinker their estimates of growth ahead of Thursday’s preliminary Q3 GDP report. As far as the trade report is concerned, we expect the goods deficit to have narrowed by US$2.1bn to US$81.0bn in September, with exports likely growing for a fourth consecutive month – but remaining well below pre-pandemic levels – and imports perhaps pausing after reaching a 7-month high in August.

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