Call us on 1300 794 893

Your Money

[FIXED INCOME] Australian dis-inflation

Jonathan Baird is an investment specialist with UBS

As we move towards Tuesday's RBA meeting, an exceptionally low CPI print may have provided a building catalyst to bring forward an easing from an otherwise reluctant central bank.  

The -0.2%qoq Headline CPI was well below consensus at 0.2%qoq and dragged annual inflation down to just 1.3%yoy. Putting this into perspective, this is the first negative quarterly print since 2008 and only the sixth in 30 years. Most relevant, is the sharp decrease to the less volatile measures of inflation such as trimmed mean Core CPI which indicates that this is a structural rather than cyclical decline in inflation.  This provides scope for the RBA to cut rates to avoid a tightening in financial conditions when the household sector is heavily indebted.

The currency remains 10% higher than its January lows and whilst not being a determining factor for the RBA to move, it is a 'complication' for the economy's transition away from the commodity cap-ex boom. 

With inflation undershooting, the bond market moved from pricing in less than 15% probability of a rate cut to over 60% on Thursday. Although, it is now evenly split at close to 50%, with the market continuing to grapple with implications of employment data printing above forecast and the impending Federal  government budget delivery on Tuesday. 

Looking internationally, as expected the Fed left rates on hold on Wednesday night and while they retain a positive outlook with respect to the US labour market, they acknowledged the US economy's slow start to 2016 and an expectation that inflation will continue to undershoot in the short-term, before the rebasing effects to components such as oil start to flow through. The Fed's funds path is uncertain, but the softer than anticipated US GDP growth release continues to support a very gradual one indeed. 

The BoJ's inaction disappointed the market on Thursday which was expecting further stimulus but we do expect the BoJ to act over coming months.  The reaction was mostly reflected by the currency market with the Yen strengthening.

There have been some significant data points over the week and they have continued to support our outlook for the economy and bond market - the RBA has articulated a reluctance to ease, but the headwinds continue to build and we believe will ultimately force the board into action over coming months.  Critical data points remain employment, GDP (release due 1 June 2016) and inflation – the latter we now know is somewhat below the RBA's target band of 2% to 3%.  We expect the Australian bond market will outperform other global bond markets such US over the medium-term as domestic rates move lower and supply dynamics for Australian credit remain relatively supportive.

Published on: Friday, April 29, 2016

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300