Share markets have seen another volatile week being buffeted by waxing and waning fears of Russia invading Ukraine and fears of inflation and interest rate hikes. 

This left US, European and Japanese share markets down. Solid profit results helped protect the Australian share market last week, which was up slightly, with gains in health, property and consumer staple shares offsetting falls in IT, telco and material stocks. US and global shares are at high risk of a re-rest of their January lows and this would likely drag Australian shares back down too. Long term bond yields had a mixed week with safe haven demand partly offsetting rising inflation and rate hike expectations with yields up in the US, Japan and Australia but down in Europe. Oil prices briefly rose to their highest since 2014 on Ukraine tensions before falling back. Metal prices were flat, but the iron ore price fell.

What could drive a June rate hike from the RBA? 

Our base case remains that the first hike will come in August but the risk of an earlier move in June is high, and this has been reinforced by another strong jobs report for January. The RBA is clearly focussed on achieving full employment, seeing wages growth of 3% or more and the trimmed mean measure of inflation being sustained in the target range. Looking at each of these:

• Unemployment is currently at 4.2% and likely to slip below 4% by mid-year, which will leave it consistent with the RBA’s full employment objective given Assistant Governor Ellis’ indication that NAIRU (the non-accelerating inflation rate of unemployment) is between the high 3s and low 4s.

• December quarter wages data will be released in the week ahead and March quarter wages data will be released in the second half of May. RBA forecasts imply 0.6%qoq increases for both quarters, but various business surveys and anecdotal evidence point to an acceleration. For example, the ABS’s weekly payroll jobs data show a significant acceleration in total payroll wages growth relative to total payroll jobs growth since mid-last year. This is not a pure guide to wages growth as it will be affected by things like compositional change in the workforce and hours worked but it does suggest an acceleration in wages growth. We expect 0.8%qoq increases in wages in each quarter which would translate to above 3% at an annualised rate.

March quarter CPI inflation data will be published at the end of April. RBA forecasts imply about a 0.7%qoq increase in the trimmed mean inflation rate but given indications from businesses regarding cost pressures and price increases it could easily come in at 1%qoq again, which yet again would be well above RBA forecasts.

In our view, a combination of a further decline in unemployment, an acceleration in wages growth to 0.8%qoq for the December and March quarters and another upside surprise on inflation this quarter together would likely clear the way for a June rate hike. A rate hike in May is conceivable but the RBA won’t have the March quarter wage report by then and May will likely be in the midst of an election campaign. So while our base case is for the first hike to be in August, a June rate hike is a high risk. First thing to watch will be today's wages data.

There was some good news on inflation in China in January with both producer price and consumer price inflation slowing. And Japanese inflation also slowed. The slowdown in Chinese inflation partly reflects it being well ahead in terms of policy tightening which started early last year, whereas western central banks are only just starting to tighten.

But it’s also consistent with the message from our Pipeline Inflation Indicator, which tracks supply chain pressures, that global inflationary pressures may be starting to roll over. This is a bit tentative, and it won’t prevent rate hikes over the next 6 months but it points to some relief on the global inflation front in the next 6 months or so which should help take some pressure off global central banks in the second half of the year.  

Economic activity trackers

Our Australian Economic Activity Tracker recovered further over the last week and is now at a pandemic era high reflecting improvement in mobility, restaurant bookings and job ads. With further reopening in NSW and Victoria, further recovery is likely. The shallow and brief dip in the Tracker points to far less impact on March quarter GDP than seen with the Delta lockdowns in the September quarter. In fact, we just see a moderation in the rate of GDP growth rather than a contraction. Our US and European Economic Activity trackers also improved, more so in Europe reflecting reopening.

Australian economic events and implications

Despite the Omicron surge, the Australian jobs market remained very tight in January with unemployment staying at a 14-year-low. Labour market underutilisation is also at levels last seen in 2008 when wages growth was 4.3%yoy. Hours worked took a hit as more workers than normal took sick leave or annual leave but participation actually rose and remains around record levels. With covid cases falling and mobility on the rise, a rebound in hours worked is likely in February and unemployment is likely to have fallen below 4% by mid-year which will have taken it into full employment territory. The continuing strength in the jobs market adds to confidence that wages growth will reach 3%yoy by mid-year, which is well ahead of RBA forecasts that see it hitting 3% only in mid-2023.

The Australian December half earnings reporting season is now nearly 60% complete and the indications are that companies have weathered the Delta wave and are now weathering the Omicron wave reasonably well. 

However, supply shortages both in terms of goods and labour are causing significant issues in terms of pricing and/or margin pressure (as evident from a range of companies including Boral, Aurizon, JB HiFi, Ansell, GWA and Wesfarmers) albeit they are a benefit to some (like Seek) and JB HiFi expressed some optimism that the higher prices will be short-lived.

So far beats are outnumbering misses by a wide margin at 47% of results to 29%, but there has been a slowing in momentum with only 59% reporting profits up on a year ago which is down from 75% in the last reporting season and 54% have raised dividends which is less than the average of 59%. However, reflecting the bias towards upside surprises 51% have seen their share price outperform the market on reporting day. Consensus earnings growth expectations for the current financial year have edged up from 13.1% to 13.3% helped by energy and financials.