The big picture
In the coming week, the Bureau of Statistics releases the all-important figures on inflation. In most countries, ‘inflation’ is meant to describe changes in consumer prices, and we are no different in Australia. But there isn’t just one measure to watch – in fact, there are quite a variety.
The ‘headline’ Consumer Price Index (CPI) result is the measure published on page one of the release. In the March quarter, the CPI rose by just 0.4 per cent to stand 2.7 per cent higher than a year ago. Now given that the Reserve Bank aims to keep inflation between two to three per cent over the medium-term, clearly this was an encouraging result, causing the Reserve Bank to stay on the interest rate sidelines.
Around 100,000 price quotations are taken each quarter to arrive at the simple CPI result. So clearly it’s not a trivial exercise with items grouped into 90 expenditure classes with weights applied to those classes to highlight their importance in consumer spending.
Interestingly there has been tremendous focus on rising electricity rates – consumers are presumably not spending because rates have gone up so much. But electricity only account for around two per cent of the CPI. And utilities as a whole accounts for just over four per cent. In other words, if electricity prices lifted by 10 per cent in the quarter, it would only cause the CPI to rise by 0.2 per cent. If the price of petrol were to lift by 10 per cent, it would cause the CPI to rise by 0.4 per cent.
Unfortunately, many consumers believe that items like electricity rates are more important to their budgets than what they really are. And the gloom that descends when the electricity statements are opened is clearly influencing spending decisions.
Of course, apart from the ‘headline’ CPI and its composition, policymakers are keen to strip away some of the layers of the CPI to find out what is going on beneath the surface. There are nine separate measures published by the ABS under the title of ‘Analytical Series’. And the ABS also publishes 13 ‘exclusion’ measures where parts of the CPI are excluded from inflation calculations.
In the December quarter, it was clear that the ‘headline’ and ‘underlying’ measures were similar with growth around 0.4 per cent. In the March quarter figures on Wednesday, there are likely to be major differences between the headline CPI measure and “analytical” concepts. At the end of the day, it is the ‘analytical’ concepts that will win out in terms of setting interest rates. But given how many difficulties retailers are facing in lifting prices, the Reserve Bank isn’t likely to be lifting rates any time soon.
The week ahead
The domestic economic calendar is understandably sparsely populated given that there are only three working days in the coming week. But no such problems in the US. A raft of indicators is due for release with the Federal Reserve policy-making meeting thrown in for good measure.
In Australia, just one indicator dominates attention – the latest inflation reading, or Consumer Price Index (CPI). The interesting aspect of this release should be the distinction between the ‘headline’ or published CPI result and the ‘underlying’ measures of inflation. The headline result will be boosted by factors outside Reserve Bank control – floods in Queensland, boosting fruit and vegetable prices, and higher petrol prices. As a result, we expect that the CPI rose by 1.3 per cent in the quarter and 3.1 per cent over the year.
But then there is the rampant discounting undertaken by retailers in an attempt to get consumers to part with their cash. As a result the ‘underlying rate’ – excludes volatile factors – may have only risen by 0.6 per cent, keeping annual growth in the lower end of the two to three per cent target band near 2.1 per cent.
Apart from the CPI, the other indicators to watch over the week are private sector credit (lending) and the RP Data-Rismark home price index, both out on Friday. Expect a 0.3 per cent lift in credit and flat home prices.
In contrast to Australia, there is clearly not a shortage of indicators or events to track over the coming week. On Monday, data on new home sales is released while the Case Shiller home price series and consumer confidence are both on the agenda for Tuesday.
On Wednesday the Federal Reserve will hand down its interest rate decision (Thursday morning AEST 4.15am) while data on durable goods orders is issued. The advance reading of economic growth (GDP) for the March quarter is released on Thursday together with pending home sales. And on Friday, personal income and spending, the employment cost index, consumer sentiment index and Chicago purchasing managers index are all scheduled.
The two key events to watch are the Federal Reserve decision and economic growth estimates. Federal Reserve members have been sprouting a variety of views in recent times. Some believe that the second installment of quantitative easing (effectively printing money) should run its course while others believe the Fed should be starting to think about tightening policy. Federal Reserve chairman Ben Bernanke doesn’t seem to be in a rush to remove monetary stimulus, as highlighted by his ‘dovish’ views on inflation risks. But we’ll get a chance to hear his views in more depth, as this will be the first meeting to be followed by web conference.
The economic growth figures should reveal a slowdown in the March quarter with the annualised pace of the economy easing from 3.1 per cent to around two per cent (0.5 per cent growth in the quarter). Clearly, the economy ebbs and flows over time, so not too much should be read into the data, especially as forward-looking figures remain positive.
And the other indicators should also be encouraging. New home sales are tipped to rise from 250,000 to 280,000; new orders for durable goods are expected to lift by one per cent; and personal income is seen lifting by 0.4 per cent in March with spending up 0.5 per cent.
The US profit reporting season really takes off in the coming week with more than 950 announcements expected. The peak day is Thursday, but there are around 200 companies to report from Monday to Wednesday. On Monday, 3M, Amazon, Coca Cola, Office Depot and US Airways are amongst those to report. On Tuesday, notables include ConocoPhillips, Credit Suisse and eBay. On Wednesday earnings are expected from Deutsche Bank, Dow Chemical, Exxon Mobil, International Paper, Microsoft, Motorola, PepsiCo, Procter & Gamble and Resmed. On Thursday, Caterpillar, Chevron and Merck are slated to report.
Interest rates, currencies and commodities
We now seem to accept an Australian dollar around 105 US cents without batting an eyelid. But it is worth highlighting the significance of the current level of the currency. The last time that the Aussie dollar was at current levels between 105 to 107 US cents was 29 years ago in May 1982. At that time 10-year government bond yields were 16.4 per cent, 90-day bill yields were 18.45 per cent; the inflation rate was 10.6 per cent; and wages were growing at a phenomenal annual rate of 23.8 per cent.
Clearly these were times when inflation was rampant. The second oil shock of 1979 had a lot to do with it, but in May 1982 commodity prices were in retreat rather than rising. The CRB futures index peaked at 335 in November 1980 but it had fallen to 245 in May 1982. Currently the CRB futures index is around 360. And rather than being close to zero, the US federal funds rate in May 1982 stood at 12.5 per cent, easing from highs of 14 per cent in April.
Clearly the Aussie dollar is not just at high levels because the Chinese economy is growing strongly, but Australia’s interest rate advantage also has a lot to do with it. Never before had the US federal funds rate fallen to zero (actually zero to 0.25 per cent band) while Australian interest rates are close to ‘normal’. We should never forget how remarkable are the times we are living in.
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