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Monday, 29 May 2017

Inflation spark

Iron, old iron...

The iron ore price continues to get absolutely marmalized.

Despite improvements having been reported on global manufacturing performance indices port inventory levels are reportedly very high. 

Not great news for Australia, being our most valuable export commodity an' all that...

Big week of news

I previously outlined the case for interest rates potentially falling yet further here, although futures markets didn't much agree with this thesis at the time. 

A key point of note is that the underlying rate of inflation has been tracking and remains below the target range, while the inflation survey is known to be upwardly biased

And as residential construction activity contracts, the inflation rate could continue to track below target for even longer. 

Hold your horses

However, an important counter-argument is that there will be some very sharp increases in electricity prices pulling inflation higher this year, perhaps up to 30 per cent for some eastern seaboard consumers.

Granted, the core inflation measures should trim these rises back in the impact quarter, but any higher headline rate of inflation will provide the perfect reason not to cut rates, should a reason be wished for (and this seems likely to be the case). 

Adding in the fact that the headline unemployment rate just dropped to 5.7 per cent - and the rather important point that the RBA Governor just doesn't seem to want to cut rates! - and futures markets are pricing in just 5 basis points of cuts by the Reserve Bank of Australia (RBA) by November. 

Over the next few days, there are a number of key data releases which will go some way to determining sentiment.

These include the Building Approvals figures for April due out tomorrow, as well as Private New Capex, Retail Trade, and the Australian National Accounts for Q1 2017 (which are expected to produce a very soft result, albeit partly due to the Cyclone). 

If these data print on the downside we'll be learning more about Governor Lowe's views over next few months...