Is AU CPI a Gamechanger?

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Market Drivers October 28, 2015

AU CPI misses at 0.3% vs. 0.5%
Riksbank leaves rates unchanged but expands QE
Nikkei 0.67% Europe 0.41%
Oil $43/bbl
Gold $1170/oz

Europe and Asia:
AUD AU CPI 0.5% vs. 0.7%
EUR GFK Survey 9.4 vs. 9.5

North America:
USD Trade Balance 8:30

USD FOMC Statement 14:00

Australian inflation readings came in much cooler than expected sending Aussie plunging in early Asian trade as some market participants began to price in the possibility of an RBA rate cut at the upcoming meeting next week.

The Australian CPI figures missed on all fronts coming in weaker than forecast on headline, trimmed mean and weighted average basis. The headline numbers printed at 0.5% versus 0.7% eyed, the trimmed mean was only 0.3% versus 0.5% and the weighted median numbers were similar.

Since AU CPI data is only reported on a quarterly basis, the markets take the release very seriously and the surprising weakness in price levels immediately sent Aussie lower by half a penny but the unit found support ahead of the .7100 figure. The debate amongst analysts now is whether this data point will force the RBA to consider easing next week, or whether the policy makers in Sydney will decide to hold off at least until December before making any moves.

The opinion is split with ANZ analysts suggesting that the past six months annualized rate of inflation is now only 1.7% – well below the RBA’s target of 2-2.5%. Westpac strategists however noted that the RBA will not move on rates until there is a marked deterioration in economic data and that they will look through the disinflationary trend for now.

We tend to agree with the later point of view if for no other reason that it would be awkward for RBA to lower rates just as banks in Australia are actually raising their mortgage rates in response to still strong housing demand. We believe that the RBA will want to see the later employment data by the middle of next month before committing to any further easing action. Last months data disappointed the market showing a decline in the headline number and if November’s report also shows a contraction in jobs the RBA would be more motivated to act in December.

The low CPI readings however point to a larger issue across the whole G-20 universe – namely that inflation pressures have been completely missing diven lower in part by the declining energy costs and partly by lackluster consumer demand. Given these conditions it’s difficult to imagine that the FOMC meeting later today would issue a hawkish press release.

No one anticipates any change in policy but the market will carefully scrutinize the tone of the communique from the Fed. With growth subdued and inflation tepid the Fed should maintain present policy.However. US authorities have come under increasing attack for being too cautious in normalizing monetary policy and may feel compelled to move by December irrespective of the underlying fundamentals. If they do hint that shift is coming the greenback would get a late afternoon boost with EUR/USD likely dropping through the 1.1000 figure while USD/JPY could challenge the 121.00 level once again.

Boris Schlossberg
Managing Director

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