CPI Data

The CPI figures released yesterday came in lower than expected, with the underlying CPI coming in at 0.55%, significantly lower than the expected 0.7%. The headline inflation came in as expected, with 0.7% in Q3 and 2.8%yoy, which is notably below the RBA’s topside target of 3%. Prior to the announcement, markets had forecasted around a 50% chance of a rise, however in early trading this morning, this has dropped to around 15%. We believe that this is an over reaction, as the RBA will be looking to the medium term for its policy position. The Bank has a history of surprising the market, as demonstrated last month and at the initial tightening period. We are expecting a 40%-50% chance of a hike next Tuesday.

The latest Bloomberg survey consensus sees most economists predicting the RBA to hold next week, but to raise the cash rate in December. The median consensus is for a peak cash rate of 5.5% by Q3 2011.

In other news, the Wall Street Journal reported that the FED was likely to ‘only’ purchase a few hundred billion dollars of US Treasuries in next weeks meeting. This raised concerns that (lack of) Quantitative Easing measures will not be enough to support a recovery, and as a result the markets were in the red throughout the session.

No news in Australia today, however the Bank of Japan will announce its policy decision this afternoon. Tonight will see US jobless claims, Euro zone Confidence and German Unemployment data released

CPI

Australian CPI is released today at 11.30am and will be the key indicator as to how the market will price in a hike for next Tuesday (currently around 50%). The majority of economists are expecting a 0.7% number for headline and underlying, and this would see yoy underlying inflation at 2.5%, while the headline CPI would slow to 2.8%yoy. A figure of 0.9%qoq or higher would all but guarantee a rise for next Tuesday.

Data from the overnight session in the US resulted with an initial fall in stock index prices as the Case-Shiller house price index reported a 0.3% fall for August. These results however were reversed as Consumer Confidence came in higher, up from 48.6 to 50.2 in September, and higher than the expected 49.9. In other news from the Northern Hemisphere, UK GDP figures for Q3 came in double the consensus to 0.8% (0.4% expected) for an annual pace of 2.8%yoy. S&P (Ratings Firm) also announced it had upgraded the UK’s sovereign outlook, bringing it back to “stable” and reaffirming the AAA rating. As a result of the combined data, the Pound jumped almost 1%, and just fell short of the 1.5900 mark.

Rural Bank
Bendigo & Adelaide Bank (BAAB)have agreed with Elders Ltd to buy the 40% of Rural Bank that they don't already own. I'll keep you posted as to whether this results in Rural and BAAB coming under the one ADI licence which will impact on spreading deposits to access the guarantee through the Financial Claims Scheme.

Producer Price Index

The Producer Price Index (PPI) for Q3 came in much higher than expected, rising 1.3% for the quarter, a big jump from the 0.5% expectation. Final Commodities were the big mover, up 1.3% from a forecast 0.5% and this insured that utilities rose by 8.9%. Prices for consumer goods were up 1.8%, with domestic goods rising 2.1% and imports up 0.8%. Although the PPI does have a mixed relationship with the CPI, the upside risks for tomorrows figure have materialised as prices for electricity, gas and water are up 8.9%, and this will partially move through too consumer prices. As stated yesterday, the PPI doesn’t usually have to much influence on the market, with the futures ‘only’ pricing a further 18% (56% chance) of a hike Nov 2.

The RBA Governor Glenn Stevens spoke yesterday, making some remarks about the international controversy about the intervention of currency markets. He stated that the imbalances would not affect global growth, however would shift growth from one part of the world to the other. Stevens stated nothing about the near term outlook of the Australian Economy with the board meeting just one week away.

Terms of Trade

Terms of Trade figures for Q3 were released on Friday and point to another hefty rise in the price of Australia’s exports. The pure price index measure reported that export prices in $AUD terms rose 7.8% for the quarter with mineral ores leading the way up 14.6%. Coal was also up 17.4% and gas (natural and manufactured) was 15.6% higher. For import prices, there was a small rise of 0.7%, with the appreciation of the $AUD helping to keep prices in check.

The G-20 Finance ministers meeting over the weekend had a key focus on currency devaluations as the US had put forward either specific currency or balance of payments targets. No detailed agreement could be reached, however Ministers did come to some agreement to see a move over time towards more market determined exchange rates. Only time will tell to see if this occurs.

Producer Price Index (PPI) for Q3 is released at 11.30am today, however the highlight of the day will be Glenn Stevens (RBA Governor) speaking to the AiG Annual National Forum in Canberra. The market will be looking for any clues going into the live meeting next Tuesday.

An important week ahead in the markets as the headline act on Wednesday (Q3 CPI) will weigh heavily on the Nov 2 rate decision. The Fed Chairman Bernanke is speaking tonight and the market will be looking for further comments into Quantitative Easing. GDP and Consumer confidence are also released this week in the US, and may provide some insight for overseas conditions, as the RBA is still concerned about Global growth. Traders are expecting a 40% chance of a rise in the cash rate next Tuesday.

Chinese data

The Chinese data came in around par yesterday with economic activity remaining firm. GDP for Q3 rose by 9.6% yoy (9.5% yoy expected), however is still down from Q2’s 10.3%. Partial CPI came in slightly higher than expected to 3.6% and Industrial Production was a little lower at 13.3%, down from the consensus of 14%. Urban Fixed Income was also close to expectations, rising to 24.5% from last months 24.8%. China is slowing as anticipated in the wake of stimulus withdrawal, however the pace of the slowdown is not accelerating. For Australia, the good news appears to be that China’s economy is moving at a sustainable pace.

Import and Export data is out in Australia today, however it shouldn’t cause too many fireworks in the markets. The markets will also keep a close eye on the G-20 meeting in South Korea this weekend.

BOE Minutes

Australia’s Department of Education, Employment and Work Place Relation (DEWR) skilled vacancies for October fell by 0.5% after a revised fall of 0.7% the previous month. Despite this, annual growth rates remain strong indicating improving labour demand, and this continues the trend in overall employment post GFC.

In the UK, the BOE Monetary Policy Minutes showed a three way split, with one member wanting a 25bps hike, and another voting for a further £50 billion in Quantitative Easing. The main body of the committee decided to sit on no change. UK Treasury Head George Osborne outlined his budget cuts yesterday to the form of £50 billion, which included savings in welfare and Government departments. These cuts further outline the RBA’s comments on Tuesday, which indicated that some economies would struggle to stimulate in the event of another recession.

Today in Australia, the CBA Housing Affordability Index is released, however the market will be more focused on the plethora of data released for China. Figures due include GDP for Q3, CPI, Retail Sales, Industrial Production and Urban Fixed Investment.

RBA Minutes

The RBA Minutes released yesterday revealed a much more balanced Board meeting than the market had anticipated. Although the Bank did refer to a tightening bias with the Asian region remaining strong there was concern for the North Atlantic economies as growth remained subdued. The minutes pointed out that “there were clearly downside risks, not least because there was little room for policy to respond if conditions deteriorated”.

The domestic economy has developed as the RBA had expected over recent times, with the CPI release on Oct 28 the next big ticket item. Confidence within the business sector remained at or above average levels, even though Business credit had fallen, reflecting investment expenditure funding from higher profits. The Board also took the AUD appreciation into account as it represented “a tightening in financial conditions”, allowing for a little more flexibility in regards to monetary policy.

Looking to the Nov 2 meeting, it appears to be an each way bet. As stated, “rates would need to rise at some point”, however the Board does appear to have short-term options. We are still expecting a rise before Christmas. The other factor they need to consider is a 25 point rise may result in a 35 - 50 point rise in mortgage rates as banks claw back margin. The 25 point cash hike will therefore have a much more pronounced effect than intended.

Click here for a link to the Minutes.


CHINA
Overnight the People's Bank of China lifted interest rates by 25 points. There was no explanation for the rise but their Q3 GDP figures are due out in two days so it could be that the previous efforts to calm the economy may not have been successful. As a result the AUD has come back a couple of cents.

Further Quantitative Easing

Quantitative Easing is still the talk of the US market, with Dennis Lockhart (President of Atlanta Fed) saying that he would support further QE. The downside risks appear to be growing, with fears of deflation increasing the already high unemployment. As a result, the USD has lost its gains from yesterday’s Asian session.

The RBA Minutes for the October meeting are released today, and the market will be looking for guidance in the November decision. After the surprise of last month, the discussion of the labour market and the medium to long term inflation outlook will be interesting to see, as it was evidently absent following Octobers decision.

Parity Soon

The AUD traded briefly over parity on Friday night. It got to 1.0004. Ben Bernanke was speaking and although cautious on the US economy announced no specific plans to further stimulate the economy. They are likely however to announce further Quantitative Easing at the next board meeting (Nov 3) and at this time, with the effect being to 'print money' the USD will drop and the AUD is predicated to move to a sustainable position above the USD.

The RBA Minutes for the October meeting are released tomorrow.

AUD Falls Just Short

The AUD almost hit parity overnight printing 0.9994, however just failed to reach the mark after a week Euro session. Despite the bounce, the 1.0000 figure is not to far away with NAB forecasts predicting the AUD at 1.05 by mid 2011.

The US PPI rose 0.4% in September and is up 4%yoy, with the core PPI at 0.1% as expected, for 1.6%yoy. The US trade deficit also higher for August at $46.3bn, up from the median $44bn. The “prophet of doom” Nouriel Roubini, the economics professor at New York University who predicted the credit crisis stated that the US has a 35-40% chance of a double-dip recession.

There is no key data in Australia today, however tonight will see a busy schedule in the US. Ben Bernanke is giving a speech on “Monetary Policy Objectives and Tools in a low-Inflation Environment”, and will be closely watched by the market. September CPI and Retail Sales are also released, and the market will also note the Michigan Consumer Confidence. Europe will also see CPI and trade figures released.

Update

There were positive numbers from the Northern Hemisphere last night, with solid earnings across US stock markets following the momentum of the FOMC minutes released yesterday. Eurozone industrial production for August rose 1%, above the 0.8% median and UK unemployment dropped to 7.7% from 7.8%.

The Chinese trade surplus dropped $16.88bn from the median $17.75bn in September with exports slowing to an annual pace of 25.1%. Despite this, import and export levels remain strong and will continue to drive the local sector.

Australian consumer confidence rose 3.3% in October after a fall of 5% the previous month putting a little more pressure on the RBA to lift rates on Melbourne Cup day. A run away dollar may give them cause to pause though. At time of writing the AUD was .9920

Fed Minutes

The Federal Reserve Minutes have suggested further Quantitative Easing (QE) is just around the corner. They can't use monetary policy as their rates are already rock bottom. QE is effectively printing money that they pour into the economy to stimulate and inflate it. They stated that additional monetary stimulus “may be appropriate before long”, but would be dependent on future information about the economic situation and outlook, given the “considerable uncertainty about the
current trajectory for the economy”.

NAB Monthly Business Survey
Australian NAB Monthly Business Survey reported that business conditions improved by 2 points to +7 in September, to be just above the long term average. Confidence was little changed, down 1 point to +10. The survey is consistent with domestic demand running at an annual rate of around 3¼% in Q3 – well down from rates of growth reported in Q2

Housing Finance

The Australian Housing Finance figures for August came in line with expectations with the number of owner occupied approvals increasing by 1%. Approvals for the purchase of new dwellings fell by 2% and the construction of new dwellings also dropped, continuing the trend since the ending of the First Home Buyers Grant. On the Global front, the OECD indicator for the 33 industrialised economies dropped from 103 to 102.9. This leading indicator, which looks forward into economic activity, may become an issue for policy makers as it could possibly signifying a global relapse into weak growth.

Weak U.S Employment

U.S Non-farm payrolls for September came in worse than expected on Friday night local time. Private sector jobs growth was 9k short of the median forecasts while unemployment remained unchanged at 9.6%. Local Government employment dropped by 76k, as budget pressures continue to tighten spending. This data merely confirms how the U.S economy is slowly moving along, and may be another catalyst for further Quantitative Easing.

On the local front this week, the Nab business survey for September will be released Tuesday and Westpac Consumer Confidence on Wednesday.

Employment

Employment figures released yesterday again continued the trend of increasing demand for labour as employment rose by 49,500 (above the market forecast of 20k). Of which, 55,800 were full time, as part-time fell by 6,300, and interestingly, hours worked dropped by 0.1%. The unemployment rate remained steady at 5.1% as the participation rose dramatically from 65.4% to 65.6%, once more showing the confidence of the local market. Short-term futures were heavily sold off (yield went higher) as the market immediately priced in a 65% chance of a rate rise in November. RBA Deputy Governor Ric Battellino is speaking today and it may be interesting to hear his views on both the domestic and international markets as we head into a ‘live’ meeting in November.

World Growth

The IMF’s world economic outlook raised its global growth for 2010 to 4.8%, revised up from 4.6%, however 2011 forecasts have been downgraded to 4.2% from 4.3%. Advanced economies appear to be the hardest hit, with growth of just 2.7% and 2.2% respectively, and they mentioned that monetary authorities “may have to resort to further unconventional measures if private demand weakens”, which may leave the FED open to further Quantitative Easing. Notwithstanding this, Australian growth predictions remain strong at 3% in 2010 and 3.5% in 2011.

Employment:

Employment data is released today with the median market forecast predicting jobs to remain unchanged at 5.1%, however some economists are predicting a drop in 20k to 5%, which may place further pressure on the RBA to hike.

RBA leaves cash rate at 4.50%

Despite wide spread expectations the RBA kept rates on hold yesterday regardless of the strengthening local economy and strong Asian commodities demand driven terms of trade. Underlying inflation appears to be the reason for the stance, as it has remained steady at around 2.75% over the past year. In light of this, we are still expecting a rate rise next month unless there are any surprises with the CPI release on the 28th of October. Capacity constraints are still likely to place pressure on inflation in the medium to long term. So once again the question is not if, but when. The RBA stated yesterday that “if economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target”.

Also released yesterday were retail sales for August, remaining steady at 0.3%, just below the 0.4% median and appears to be consistent with long run averages. The trade balance was up in August with a surplus of $1.7bn, which was an increase of $2,348mn on the previous month. ANZ job ads were also released with mixed results, as internet ads were up 0.7% and newspaper ads falling by 1.9% (Continuing long term trend).

In summary, global concerns over debt in Europe and the degree of uncertainty throughout the northern hemisphere appear to have softened the RBA’s outlook. However, the Australian economy appears to remain strong, with the mining sector leading the way as demand from Asia continues to push commodity prices higher. With falling unemployment and the economic growth within the local region make it unlikely we will have to wait until February to see the cash rate rise.

Consequently rates have dropped across the curve - about 15 points in the short and around 10 points in the longer end.

Inflation Data

Data released yesterday from the TD Securities-Melbourne Institute showed that inflation, at least in the short term eased to 0.1% for the month of September, and 1.3% over the last 3 months in annual terms. Whether or not this will be enough for the RBA to keep rates on hold, along with the weak data released last week, is the question that will be answered at 2.30 today.

With commodity prices back to near boom levels, and strong growth forecasts for China and India indicate that the economy will be pushed to near capacity levels, creating inflationary pressure. As the RBA will be looking 1.5 to 2.5 years ahead, the strong underlying fundamentals ensure that there will likely be a rise in the cash rate. The market has priced in a 72% chance of a rise today.

Soft Data

Yesterday some soft data reduced the pressure on the RBA to raise rates prior to seeing the CPI figures at the end of October. Building Approvals were down 4.7%, RBA Credit Growth, +0.1% and Rismark House Prices, dropped down 0.2% and revisions now show three months in a row of house price falls. Chances of a rise next week have now dropped to 50:50

Europe:
Overnight, Moody’s downgraded Spain (by one notch to Aa1/Stable) and
Ireland announced that Anglo Irish Bank will need total capital of
EUR34.3bn (up from EUR25bn) and Allied Irish Banks will need a further
EUR3bn injection (up from EUR7.4bn) by year end.