Weekly Market & Currency Developments – From Our Bankers

Investor Signposts: Week Beginning April 22 2018

Australia: Inflation in the spotlight

•  In Australia in the coming week, readings on inflation dominate. In the US there is a broad range of indicators to be released including economic growth.

• The week kicks off on Tuesday when the Bureau of Statistics (ABS) releases the March quarter Consumer Price Index – the main measure of inflation in Australia. The annual rate of inflation has only been in the Reserve Bank’s 2-3 per cent target band for one quarter in the past three years. And we expect that low inflation prevailed in the March quarter.

• Overall we expect that both headline and “underlying” measures of inflation rose by 0.5 per cent in the March quarter to be up 2 per cent over the year. Seasonal increases in education fees, pharmaceutical products and domestic travel are expected, offset by seasonal falls in international travel. Some product prices may have been affected by post-Christmas sales. And petrol prices may have lifted by less than 1 per cent.

• Inflation results in line with forecasts will reduce the odds of the Reserve Bank lifting interest rates in 2018.

• Also on Tuesday the weekly gauge of consumer confidence is issued by ANZ and Roy Morgan. And the Reserve Bank Assistant Governor Christopher Kent delivers a speech at a Housing Industry Association breakfast.

• After the ANZAC Day observance on Wednesday, investors will focus on export and import prices when they return to work on Thursday.

• Export prices will be constrained by lower coal and iron ore prices, although offset by higher oil prices. Import prices will be boosted by the higher oil prices. The Aussie dollar also fell only 1.7 per cent over the quarter.

• On Friday the ABS releases the Producer Price Indexes – measures that will provide a guide on inflation across the business sector. In the December quarter, the ‘final demand’ measure was up 0.6 per cent to stand 1.7 per cent higher over the year. Investors will closely watch building construction prices in light of anecdotes noting high demand for labour and rising wages. The 7.5 per cent lift in oil prices will serve to boost petroleum refining and petroleum fuel manufacturing costs.

Overseas: US economic growth & housing in focus

• It is relatively quiet in China over the coming week in terms of new economic data. However there will be data on industrial profits on Friday. In the US, housing market indicators and economic growth are of most interest.

• The week kicks off on Monday in the US with data on existing home sales to be released alongside the Chicago Federal Reserve national activity index. After a 3 per cent rise in February, economists are tipping a 0.2 per cent lift in sales in March. A lack of stock on the market is constraining sales but boosting prices.

• Also on Monday, the Markit organisation releases “flash” readings for activity in manufacturing and services sectors in the US, Europe and Japan. In terms of the US readings, an easing in manufacturing activity is expected to be balanced by higher service sector activity.

• On Tuesday, new home sales data is scheduled in the US, together with consumer confidence, home prices and the influential Richmond Federal Reserve survey.

• Economists believe that new home sales may have lifted 1.9 per cent in March after the 0.6 per cent fall in February to 4-month lows. Sales have fallen for the last three months. The stock of homes stands at 9-year highs, representing a supply of 5.9 months at the current sales rate.

• Also on Tuesday economists expect that consumer confidence eased again, down from 127.7 in March to 125 in April. Back in February, confidence was at 18-year highs. And home prices may have risen 0.3 per cent in February, trimming the annual rate from 6.4 per cent to 6.2 per cent.

• Also on Tuesday the regular weekly data on chain store sales in released in the US while on Wednesday, weekly data on new mortgage applications are released.

• On Thursday a key measure on business investment – orders for ‘durable goods’ – is released. Durable goods are generally described as items with lifespans longer than three years – like cars and aircraft. Orders have risen in three of the past four months. And economists believe that orders may have risen by 1.0 per cent in March.

• Also on Thursday the ‘advance’ March data on trade in goods is released. A deficit of US$75.4 billion was posted in February and the big deficits are clearly in the sights of the US President currently.

• And on Friday the ‘advance’ reading on US economic growth in the March quarter is released alongside the March quarter employment cost index (ECI). Economists expect that the US economy grew at a 2.3 per cent annual pace in the quarter after 2.9 per cent annualised growth in the final quarter of 2017. The included data on prices will be watched carefully together with the ECI. The ECI has been averaging growth of around 0.6 per cent a quarter or around 2.5 per cent over the year.

Financial markets

• US earnings season continues. Amongst companies reporting earnings on Monday are Halliburton, Kimberly- Clark, Alphabet (Google) and Barrick Gold.

• On Tuesday, 3M, Caterpillar, Coca-Cola, Corning and Texas Instruments are amongst those reporting.

• On Wednesday, AT&T, Boeing, Comcast, Facebook, Ford, Twitter and Visa report.

• On Thursday, earnings are due from Amazon, ConocoPhillips, Domino’s Pizza, General Motor, Microsoft and ResMed.

• On Friday, Exxon Mobil and Chevron report.

Weekly Global Currency Outlook

• USD will remain range‑bound this week, in our view.  There are signs of rising US inflation pressure that is supporting higher US 10‑year Treasury yields and the USD.  The prices paid subcomponents in the Philadelphia Fed and ISM surveys have increased to multi year highs.  However, slow US economic activity in Q1 (Friday) will limit USD rallies, in our view.  We estimate US Q1 GDP growth slowed to an annual pace of 1.9% in Q1 (consensus: 2.1%) from 2.9% the previous quarter.  We caution that US Q1 GDP growth is often weak despite seasonal adjustment.

• AUD/USD will be guided this week by Australia’s Q1 CPI report (Tue).  In line with consensus, we expect Q1 underlying CPI to increase by 0.5%.  We estimate annual growth will increase to 2.0%, the bottom of the RBA’s 2‑3%pa target range.  The downside risk to our CPI estimate reflects ongoing weak growth in wages.  If this risk materialises, AUD will come under short term downside pressure against most major currencies.  But Australia’s high terms of trade is providing AUD with strong fundamental support.  We estimate Q1 terms of trade increased by another 3½‑4%.  Thursday’s international trade price indices give us a sneak peek into the Q1 terms of trade.

• We expect EUR/USD to consolidate this week.  The European Central Bank (ECB) meeting on Thursday is the main event for EUR.  We expect ECB President Mario Draghi to emphasize Eurozone muted inflation to justify the ECB’s highly accommodative monetary policy.  The EUR may benefit from preliminary April PMI and the German April IFO release.  However, any lift in the EUR will not be sustained ahead of the ECB meeting in our view.

• GBP/USD is likely to consolidate this week.  Recent UK data releases suggest there is less pressure on the Bank of England (BoE) to raise interest rates in May.  The main data is Q1 UK GDP (Fri).  We estimate UK GDP increased by 0.3% (1.4%pa), though poor weather in February and March mean weaker growth is possible.

• NZD/USD has lost 1 US cent since New Zealand Q1 CPI was released on Thursday.  Despite an upward surprise to headline inflation, core inflation is subdued.  In line with money market pricing, we expect the RBNZ to begin tightening policy in August 2019.  Nevertheless, interest rates are not the major driver of NZD.  New Zealand’s record terms of trade is a major support for NZD and a reason we expect NZD to recover.

• USD/JPY has largely reflected broader USD moves recently.  However, the Bank of Japan (BoJ) meets on Friday and may inject some volatility into JPY.  We agree with the consensus that the BoJ will not change monetary policy. Japan’s CPI inflation (excluding fresh food and energy) is only 0.5%pa.  The BoJ may push out the timing of when they expect inflation to reach its 2% target from currently “around fiscal year 2019” in its economic forecast update.



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