Asia Morning Bites

Australian inflation puts the pressure back on the Reserve Bank

Min Joo Kang

Senior Economist, South Korea and Japan

In this article

Macro outlook What to look out for: ECB meeting and US GDP

Macro outlook

Global Markets: After Monday’s adverse post 20th Congress market reaction, Asian FX had a better day, with most currencies making small gains overall, though G-10 currencies staged a late rally against the USD and early trading is likely to see Asia playing catch-up. Outside of the G-10 space, the KRW and SGD both gained a little over 0.4% on the day. The CNY opened much weaker yesterday, pushing close to 7.31, but dropped back sharply in late trading to finish roughly unchanged from Monday’s close at 7.2686 as the USD lost ground against most currencies. EURUSD, for example, pushed strongly higher, reaching 0.9964, putting parity back in the cross-hairs. The AUD also made strong gains, (+1.3%) as did the JPY (+0.61%), reaching 0.6381 and 148.06 respectively. Cable has had another strong day too rising to 1.1458. A good start for PM Sunak. The catalyst for the USD’s weakness yesterday looked as it may be coming from the bond market. Fed funds implied yields were slightly down on the day, and 2Y US Treasury yields retreated 2.8bp though much bigger falls were seen in the 10Y and 30Y bonds, where yields were down 14bp and 12.8bp respectively. These declines were echoed in European bond markets. There does not seem to be any particular event or Fed remark driving this development. Yesterday’s US Macro data continued to chip away at the previous “higher for longer” rate expectation (see below). And slightly more temperate Fed comments over the previous week may now be being heeded. The lower bond yield environment won’t have hurt risk sentiment or equity markets. The S&P500 rose 1.63%, the NASDAQ was up 2.25% . After a mixed day yesterday, Asian bourses may show a little more resolve today. Asian equity futures look brighter, though the same cannot be said for their US counterparts, so any early gains may be short-lived.
G-7 Macro: As mentioned, the US data yesterday was on the softer side, with house price data showing further declines in price and bringing the August S&P Case Shiller index down to 13.08%YoY. The April peak was over 21%. Conference board consumer confidence data also showed further substantial declines in both the expectations and current conditions indices, while the Richmond Fed index was also down more than expected. Today we get trade data and new home sales. Neither release is particularly market moving, though both could keep chipping away at perceptions of the US economy’s resilience.
Australia: The 3Q22 consumer price index rose a further 1.8%QoQ, showing no slowdown from 2Q22, and takes the inflation rate to 7.3%YoY (up from 6.1%). The trimmed mean price index rose by the same amount, taking that inflation rate to 6.1% (up from 4.9%) and weighted median inflation also rose to 5.0% from 4.2%. It is hard to reconcile these latest inflation figures with the RBA’s recent slowdown in hiking to only a 25bp hike at their last meeting, and we believe these numbers must push the odds strongly back in favour of a 50bp hike at their next meeting.
South Korea: According to local business surveys, business outlook continues to deteriorate. Both manufacturing and non-manufacturing see a cloudy outlook. The Federation of Korean Industries (FKI)’s all-industry expectation index fell to 86.5 in October (vs 87.4 in September). The Bank of Korea’s survey also showed sentiment falling. The non-manufacturing outlook declined 3 pts, while the manufacturing survey fell a further 2 points. The BoK survey was conducted from October 11th to 18th, when local credit conditions squeezed sharply, and it seems that the effect had a negative impact on corporate sentiment.

What to look out for: ECB meeting and US GDP

Australia CPI inflation (26 October)
South Korea GDP (27 October)
China industrial profits (27 October)
ECB meeting (27 October)
US durable goods, initial jobless claims and 3Q GDP (27 October)
Tokyo CPI inflation (28 October)
Australia PPI inflation (28 October)
Taiwan GDP (28 October)
US personal spending, core PCE and Univ of Michigan sentiment (28 October)

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Author

Min Joo Kang

Senior Economist, South Korea and Japan