Australia Inflation Lower Than Forecast

The Dow Jones fell overnight by almost 0.5%, as did the S&P500. US durable goods data came out early in the session showing significantly better growth than expected with core durable goods orders rising 0.7% and the prior month’s figure was revised upwards to 0.5% from 0.2% originally. This data is often a leading indicator of economic activity as companies buy new equipment in advance of ramping up production.

In Australia, CPI data was released yesterday which was somewhat lower than expected despite the impacts of higher power prices. Although power prices did have an upward impact on the CPI, it was offset by deflation in food and clothing prices. This puts the Reserve Bank in a tricky situation where it can’t raise rates due to low inflation and it can’t drop rates for fear of further stoking house prices and encouraging higher household debt levels. The Canadian Central Bank made its rate decision overnight, opting to keep rates unchanged at 1.0% after two back to back rate hikes.

Bond prices fell overnight as the US 10-year yield reached 2.43%, the highest level since March. This may be due to the starting of the Fed’s plan to allow maturing bonds to roll-off rather than reinvesting the proceeds. Although this plan has only started at a slow pace of $10bn per month, it may be enough to shift market sentiment with investors trying to sell in front of the Fed. Bond yields will also be supported by the expectation of a rate hike in December which currently has a 97% certainty according to the CME Fed Watch tool.

UK GDP came out stronger than expected yesterday evening, causing a strong uptrend in the pound. This data confirms that the UK is ready for a rate hike with many analysts believing a rate hike is almost guaranteed and market pricing suggesting an almost 90% chance of a rate hike at next week’s monetary policy meeting. This would be the first rate hike since the Bank of England dropped rates to a record low of 0.25% and would bring rates up to 0.5%.     

Data Releases:

–    ECB Rate Decision 10:45pm AEDT

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This article was written by William O’Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.