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The week in finance: Inflation holds the key to another rate cut
Sunday, 23 Oct 2016 11:33:24 | Stephen Letts
Australian currency (ABC News: Nic MacBean)
Inflation will be the big number of the week, although recent history suggests it will be pretty small but perhaps not small enough to goad the Reserve Bank into another rate cut.
There is little direction from offshore with a flat end to the week on Wall Street pointing to a flat opening locally.
Over the week the Australian market was down 0.4 per cent, out gunned by the US — which was up 0.4 per cent on some solid third quarter results and stronger oil prices — while Europe shrugged off all manner of worries to finish up 1.6 per cent.
One theme that might keep a lid on things in US equity markets is the rising dollar, now trading at an eight month high, as expectations rise about an interest rate increase in December.
Market on Friday's close:
- ASX SPI 200 futures flat at 5,402
- AUD: 76.05 US cents, 69.85 euro cents, 62.14 British pence, 78.88 Japanese yen, $NZ1.061
- US: Dow Jones flat at 18,146 S&P500 flat at 2,141 NASDAQ +0.4pc at 4,852
- Europe: FTSE -0.1pc at 7,020 DAX +0.1pc at 10,710 Eurostoxx50 flat at 3,078
- Commodities: Brent oil +0.8pc at $US51.78/barrel, Gold flat at $US1,266/ounce, Iron ore flat at $US58.40/tonne
Inflation will leave Reserve Bank alert, but not alarmed
The consensus view is that consumer price inflation will rise by 0.8 per cent over the September quarter, pushing up the annual rate from 1 per cent to a still rather tepid 1.4 per cent over the year.
That headline figure out on Wednesday makes the headlines, but it is the underlying result which the Reserve Bank studies more intensely.
The mysterious underlying or core inflation is a statistician's dream — stripping out volatile things like fuel and fresh food and then averaged between the trimmed mean and weighted medium outcomes.
It is forecast to be up 0.5 per cent over the quarter, or 1.6 per cent annualised.
The RBA would be happy enough with this outcome as it is right on its forecast trajectory of a slow rise in inflation back to the 2 to 3 per cent target band.
Headline inflation is expected to be kicked higher by waterlogged fruit and vegetable production driving up prices, more expensive east coast gas and the higher excise on alcohol and cigarettes — which always kick in this quarter.
That will be offset to some extent by lower rents, but an underlying quarterly number of 0.3 per cent — or lower — might just make the RBA board think they have got their inflation projections wrong, and trigger a surprise cut.
Import and export prices (Thursday) will also garner interest, particularly if they support the idea that Australia's worrying terms of trade dive has bottomed.
NAB result to be hit by impairments and dividend doubts
The NAB kicks off the bank reporting season with its full year results (Thursday).
The headline figure will not be pretty, given the impairment ravaged first half loss of $1.74 billion.
The second half will be messy too with new impairments and discontinued operation charges taking their toll.
The bank will have to account the sale of 80 per cent of its MLC wealth management business to Japan's Nippon Life as a discontinued business, as well as a preannounced loss of up to $1.3 billion in life insurance.
UBS bank analyst Jon Mott thinks things could be worse than previously stated.
"We were surprised when NAB recorded only $368 million of bad and doubtful debt charges for four single name [large corporate] exposures in the first half and we were disappointed that NAB reported an on-going low BDD charge [$228 million] in the third quarter, implying it still had not recorded its Slater and Gordon exposure as impaired," Mr Mott said.
But NAB's Slater and Gordon "can" may have been kicked further down the road into the first half of next year.
The underlying cash profit — the figure with one-offs removed, which banks prefer to quote — will not be great either, up just 2 per cent to around $6.4 billion.
The all-important earnings per share (EPS) will probably be down around 3 per cent as earnings from MLC drop out.
As Mr Mott points out, this would make it NAB's seventh year in the past 14 where it's EPS has declined — hardly a happy history for shareholders.
"We believe the biggest focus will be whether NAB takes a more realistic view of the normalising credit cycle, and whether it cuts its dividend this half or waits until the first half of 2017 post the release of Basel 4 [tougher capital regulations] … before cutting," Mr Mott said.
The consensus view from analysts is for a 4 cent per share cut now.
Macquarie profit forecast to be flat
Macquarie group is forecast to trot out a fairly flat first half profit (Friday) of around $1 billion.
As always there are many moving parts to a Macquarie result, with weakness in capital markets and equities being balanced by expected stronger activity in commodities and financial markets.
ANZ, Westpac and a quarterly update from CBA will round out the bank's reporting season in early November.
US GDP expected to accelerate and slow in the UK
After muddling along at around 1 per cent growth for three quarters, US GDP is expected to change up a gear to 2.5 per cent annualised growth in the September quarter (Friday).
The Federal Reserve has a more reserved view than the market, forecasting 2 per cent growth.
Even if the market is correct, it is unlikely to be strong enough to deliver a surprise pre-election rise in interest rates.
There will be a couple of speeches from Fed officials on Monday before a media blackout leading up to next week's meeting of its rate setting committee on November 3.
The UK gets its first look at GDP (Thursday) since the Brexit vote with quarterly growth forecast to slide from 0.7 per cent to 0.3 per cent, although remaining flat at 2.1 per cent on an annualised basis.
It should also be a cheerless week for the Bank of Japan with another dose of deflation on the way — inflation is expected to come in at -0.5 per cent (Friday).
Chinese statisticians are having a breather after last week's data dump.
| Australia | ||
| Monday 24/10/16 | ||
| Tuesday 25/10/16 | Tabcorp AGM | Update on Tatts merger |
| Fortescue investor day | Heads up on future plans | |
| Wednesday 26/10/16 | Inflation | Q3 forecast to be up 1.4pc YoY |
| Wesfarmers update | Q1 sales coal could the big winner after being a drag for years | |
| Thursday 27/10/16 | Import/Export prices | Q3 could see an upturn in terms of trade |
| NAB FY results | $6.4bn cash profit forecast | |
| Tatts AGM | Update on Tabcorp merger | |
| Friday 28/10/16 | New home sales | Sep: Was up 6.1pc in August |
| Macquarie Group half year results | Flat $1bn profit of the half forecast | |
| Woolworths update | Q1 sales looking for evidence of a turn around | |
| Overseas | ||
| Monday 24/10/16 | US,JP,EU: PMI | Oct: Important manufacturing data |
| JP: Trade balance | Sep: Imports and exports fell in August | |
| Tuesday 25/10/16 | US: Home prices | Aug: Case Shiller series up 5pc YoY |
| US: Consumer confidence | Oct: may ease back on election concerns | |
| Wednesday 26/10/16 | US: New home sales | Sep: Flat |
| UK: Business optimism | Q4: Not very optimistic | |
| Thursday 27/10/16 | US: Durable goods | Sep: A measure of business investment, very flat |
| US: Pending home sales | Sep: 610K expected, same as month before | |
| UK: GDP | Q3: Forecast to be 2.1pc YoY | |
| Friday 28/10/16 | US: GDP | Q3: Forecast to be growing 2.5 YoY |
| US: Employment cost | Sep: Deflation a worry, -0.5pc YoY forecast | |
| JP: Inflation | Sep: Deflation a worry, -0.5pc YoY forecast | |
| EU: Business confidence | Oct: Not great but might rise | |
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