Aussie core inflation exceeds expectations

Chris Scicluna
Emily Nicol

US stocks and inflation breakevens nudge to new highs; equities mainly weaker in Asia today while an uplift in core inflation in Australia has boosted Aussie bond yields
Ahead of some major post-close earnings reports from the tech sector, the S&P500 eked out a further 0.2% gain yesterday to close at a new record high. Nominal bond yields edged lower, with the 10Y UST closing down 2bps at 1.61% after trading as high as 1.65% intraday. However, inflation breakevens continued to forge higher, with the 10Y breakeven rising a further 2bps to 2.69% (a new 15-year high) and the 5Y5Y forward breakeven rising 2bps to 2.39% (just below this year’s highs). Corporate reporting from the likes of General Electric and UPS provided support to the equity market. In economic news, while US home price inflation eased in August, new homes jumped a surprisingly large 14%M/M in September and the Conference Board’s consumer survey and the Richmond Fed’s manufacturing survey reported a welcome lift in sentiment in October. The Conference Board’s survey also indicated very healthy labour demand, with the net jobs plentiful diffusion index setting a new record high.

Post-close earnings reports from tech giants Microsoft, Alphabet and Twitter appear to have broadly accorded with investor expectations and so US equity futures are presently little changed and UST yields only fractionally higher. However, sentiment has soured somewhat in Asian markets, with most of the key bourses in the red today. In Japan, where investors are now awaiting tomorrow’s BoJ meeting and revised Outlook Report, together with the usual end of month data dump and Sunday’s lower house election, the TOPIX has declined 0.2%, thus giving back almost half of the previous day’s advance. In market news, the Tokyo Stock Exchange announced that it plans to extend its daily trading hours by 30 minutes, with the change to be implemented by FY24. Meanwhile, JGB yields have continued to drift higher, with the 10Y yield knocking on the door of 0.11% for the first time since April. China’s CSI300 has declined a much steeper 1.4% despite data indicating a lift in corporate profit growth in September, while Hong Kong’s Hang Seng is presently down 1.7% weighed down by losses in the tech sector. Elsewhere in Asia, markets are also almost 0.8% weaker in South Korea, but are firmer in Singapore and Taiwan.

In the Antipodes, the focus for Australian investors today was the Q3 CPI report, which pointed to a much broader lift in core inflation than analysts and the RBA had expected, even as the headline CPI printed in line with the consensus forecast (details further below). This sparked a sell-off in the bond market, especially near the front end of the curve, with the 3Y AGCB yield rising by more than 20bps at one point to trade above 1.0% for the first time since 2019. Perhaps recalling that the RBA is unlikely to react much to an increase in CPI inflation that is not underpinned by a material lift in wage growth – the latter yet to be seen – the bond market has unwound some of its initial losses. Nonetheless, the 3Y bond has closed up 16bps at 0.94% while the RBA’s targeted April 2024 bond closed up 5bps at 0.18% – almost double the RBA’s targeted yield. After earlier rising as much as 10bps, the 10Y bond yield has closed just 1bp higher at 1.81%, however. While the ASX200 has closed little changed, the lift in yields provided a modest boost to the Aussie dollar. In New Zealand, the earlier sell-off in Aussie bonds together with news of a sharp lift in local firms’ expectation of year-ahead inflation saw the 10Y NZGB yield rise 9bps to a new three-year high of 2.58%.

German and French consumer confidence provides mixed message, euro area bank lending expected to have remained solid in September 
Today’s German GfK consumer confidence survey provided mixed messages. At face value, today’s survey exceeded expectations and suggested another improvement in overall confidence at the start of Q4, with the survey’s headline index returning to positive territory (+0.4) in October for the first time since April 2020 and expected to rise further in November (+0.9). But this still remains well down on the pre-pandemic levels. Moreover, the improvement reflected a pickup in households’ propensity to consume amid significantly higher price expectations – indeed, the survey’s inflation-related component jumped to its highest for thirteen years. Against this backdrop, households were notably more downbeat about their income expectations at the start of Q4, while their expectations for the economic outlook also moderated too.

The message from the French INSEE confidence survey was downbeat. The headline indicator fell 2pts in October to 99, just below the long-run average. And the survey detail suggested that, despite a further decline in households’ fears about unemployment, a surge in price expectations had resulted in a decline in expectations for their future financial situation. Against this backdrop, the share of households considering it a suitable time to make major purchases over the coming year again declined to the lowest since March.

After yesterday’s ECB bank lending survey suggested ongoing stability in the sector, with loan demand from businesses rising for the second successive quarter in Q3 and expected to rise further in Q4 banks, today’s euro area bank lending figures are expected to report a further pickup in longer-dated loans in September. And while yesterday’s survey suggested that banks were planning to tighten credit standards on loans for house purchase in Q4, mortgage lending in September is likely to have remained strong.

Budget and Spending Review the main focus in the UK
The main focus in the UK today will be on the Chancellor’s Budget and Spending Review announcements. While last week’s public finance figures suggested greater scope for fiscal giveaways, the OBR’s updated economic forecasts will be based on national accounts numbers that were published before the recent significant upwards revisions and therefore suggest more limited opportunity for fiscal loosening. Numerous reports over the weekend hinted at increased spending (totalling around £30bn), including additional support for the NHS, schooling and transport amid ongoing challenges associated with the pandemic. But it is difficult to interpret to what extent this reflects new spending to what has previously been announced and over what time frame. So, as always the devil will be in the detail. And while we might expect some additional government support for lower-income households to cope with increased household energy bills, overall, we expect the Chancellor to maintain the impression that the fiscal stance will be tightened over the coming few years.

This morning has already seen the release of the BRC shop price index, which suggested that, while prices remain down compared with a year earlier, upwards pressures further up the supply chain are continuing to feed through to the High Street. In particular, retail prices reportedly rose for the fifth month out of the past six in October, to leave the annual rate of decline on the survey measure moderating a further 0.1ppt to -0.4%Y/Y, the highest since January 2020. Within the detail, food price inflation was positive (0.1%Y/Y) for the second successive month, while the decline in non-food price inflation was steady at -1.0%Y/Y. Given ongoing supply chain disruption in a range of sectors, labour and skill, a separate BRC survey suggested that three in five retailers expected prices to rise further in the run up to Christmas.

Today’s US data to inform estimates of Q3 GDP growth; another busy day of corporate reporting also lies ahead
Today’s US data flow will allow analysts to make final tweaks to their estimates of GDP growth ahead of tomorrow’s release of the advance national accounts for Q3. Daiwa America’s Mike Moran anticipates a slight widening of the merchandise trade deficit to $89bn in September. Meanwhile, he estimates a 1%M/M decline in durable goods orders in September, which will likely be weighed down by a correction in aircraft orders following a relatively high August reading and the impact of semiconductor shortages on bookings in the auto sector. Shipments data from this report will cast light on output during the quarters, as will the advance wholesale and retail inventory data that is also due today. Corporate earnings news will also remain a key focus for investors, with today’s line-up headed by results from Apple, while Boeing, Coca Cola, Ford and General Motors will also report today. 

China’s industrial profit growth improves to 16.3%Y/Y in September
A quiet day for data in China saw only the release of figures on industrial profits for September. Despite IP data released earlier this month indicating that output growth had slowed to 3.1%Y/Y from 5.3%Y/Y, growth in corporate profits increased to 16.3%Y/Y from 10.1%Y/Y previously. Cumulative profits for the year to date – which continue to make flattering reading due to base effects associated with the onset of the pandemic – increased 44.7%YTD/Y in September on sales that grew 22.2%YTD/Y. This partly reflects a near 162%YTD/Y increase in profits in the mining sector. Within the manufacturing sector, where profits grew 42.9%YTD/Y, the strongest growth remained in the metal smelting, petroleum and chemicals industries. By contrast, profits for motor vehicle producers grew just 1.2%YTD/Y, with high commodity prices and chip shortages likely contributing to this slowdown.

Australian headline inflation as expected in Q3, but core measures unexpectedly point to the broadest pressure in 7 years
The focus in Australia today was on the CPI figures for Q3 – a report that bond investors had awaited somewhat nervously in light of strengthening inflation indicators. As it turns out, while the headline CPI increased 0.8%Q/Q as the consensus had expected – with annual inflation declining 0.8ppts to 3.0%Y/Y due to base effects associated with last year’s pandemic-induced changes in government policy – the core measures pointed to a lift in prices that was much more broad-based than the market had expected. Most importantly, the trimmed mean increased 0.7%Q/Q – 0.2ppt above the consensus expectation – so lifting annual inflation by a greater than expected 0.5ppt to 2.1%Y/Y. This marks the strongest quarterly increase since Q414, while this is also the first time annual trimmed mean inflation has been inside the RBA’s 2-3% target range since Q415. The weighted median also increased 0.7%Q/Q – 0.2ppt above the consensus estimate – lifting annual inflation on this basis by 0.4ppt to 2.1%Y/Y. For this measure, this was the strongest quarterly outcome since Q413 and the strongest annual outcome since Q315.

Turning to the detail, tradeables goods prices increased 0.8%Q/Q in Q3 (up 3.1%Y/Y) and non-tradeables prices increased 0.9%Q/Q (3.2%Y/Y). A further 7.4%Q/Q increase in the price of automotive fuel – now at a record high – contributed 0.3ppt to headline inflation during the quarter, following similar contributions over the prior two quarters. Also noteworthy was a 3.3%Q/Q increase in the price of new homes – the most since the introduction of GST in 2000 – with the ABS noting the influence of robust demand, material shortages and supply disruptions. Strong demand and supply disruptions also led to further upward pressure on prices for durable goods, with prices for furniture rising 3.8%Q/Q and prices for motor vehicle increasing 1.4%Q/Q. On the other hand, prices in the clothing and footwear group fell 3.8%Q/Q. The ABS noted that retailers had discounted winter stock due to low demand – clearly a result of the lockdowns in New South Wales and Victoria.

Today’s lift in the trimmed mean will clearly have surprised the RBA, which in August had forecast that trimmed mean inflation would end this calendar year at a rounded 1¾%Y/Y – a forecast that now seems very unlikely to be met (indeed, on current trends, trimmed mean inflation could end the year around 2¼%Y/Y). While this result has strengthened the markets’ belief that the RBA will be forced to tighten sooner than hitherto forecast, the RBA’s Board has pledged that it will not consider increasing the cash rate until actual inflation is both comfortably within the target range and – more importantly – expected to remain there. And Governor Lowe has made it abundantly clear that in the Bank’s opinion, sustained inflation at target-consistent levels will likely require a lift in wage growth to more than 3%Y/Y, compared with less than 2%Y/Y most recently. With the latter in mind, the next key data release in Australia will be the Q3 Wage Price Index on 17 November. In the interim, the press statement that will follow next week’s RBA Board meeting will be awaited with greater than usual interest to see how the Board is interpreting today’s inflation surprise.

Kiwi business sentiment revised lower while inflation expectations revised up sharply to a 10-year high; trade deficit remains wide in September amidst strong demand for imports
The finalised ANZ Business Outlook survey for October pointed to a smaller a lift in Kiwi firms’ activity expectations than indicated by the preliminary survey, together with a very large upward revision to firms’ year-ahead forecast for inflation. Amidst the ongoing lockdown in Auckland, the headline general business confidence index fell to a final reading of -13.4 in October, which was only just above that seen following the initial virus outbreak in August. The far more important Activity Outlook index – which tracks GDP growth – improved 3.5pts to 21.7. This was less than indicated in the preliminary survey and so leaves the index below its pre-lockdown level and slightly below the long-term average for series. Firms’ investment intentions were confirmed to have picked up compared with September but employment intentions softened slightly, with both remaining stronger than average. Meanwhile, doubtless reflecting reaction by the late-month sample to the very strong Q3 CPI report, firms’ year-ahead inflation expectation ended the month at 3.45% – up 0.41ppt from the preliminary survey, well above the of the RBNZ’s 1-3% inflation target range and the highest reading in more than ten years.

In other news, New Zealand’s merchandise exports declined 0.8%M/M in September – a third consecutive decline following a surge to a record high in June. Even so, exports were up 9.6%Y/Y, led by growth in exports of diary, meat and other food products. After growing for four consecutive months, imports declined 2.9%M/M in September but were still up more than 30%Y/Y. Indicative of the economy’s strong momentum despite the lockdown in the north of the country, imports of consumption goods increased almost 27%Y/Y and imports of machinery and plant increased more than 30%Y/Y. Given these figures, the unadjusted trade deficit widened to a record NZ$2.2bn. While more than half of that deficit can be attributed to seasonal factors, the seasonally-adjusted balance was still NZ$0.9bn worse than a year earlier.

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