The week that was: Aussie CPI, ECB and Chinese politics - ANZ

This week, the Australian Q3 CPI was the focal point for markets, noting that we also saw key events conclude in China and Europe. 

Key Quotes:

"Starting with the CPI, both the headline and core results were below the market’s forecast but very close to our own, the headline and core actuals coming in at 0.6%/1.8%yr and 0.35%/1.9%yr. By and large, where there were discrepancies between our forecasts and the ABS figures, the actuals disappointed. 

On the basis of this report, it is difficult to see Australia breaking out of the current low-inflation ‘trap’. Our forecasts currently see annual headline inflation plateauing around 2.5%yr from September 2018. However, that excludes the anticipated negative impact of the December 2017 CPI re-weighting which should knock 0.2–0.4ppts off the pace of annual inflation by the end of 2018. Taking that into consideration, we foresee annual inflation around the bottom of the RBA’s target range through 2017 and 2018 – a strong justification for the RBA to remain on hold through 2019. 

Turning to China, the 19th National People’s Congress drew to a close this week. Highlighting his position of strength, President Xi’s “Thought on Socialism with Chinese Characteristics for a New Era” and belt and road initiative were written into the Party’s Charter and he was also affirmed as the nation’s “core” leader. Further, the structure of the new Politburo Standing Committee left no doubt that Xi Jinping plans to remain China’s leader past the end of his second term as President (which runs from now until 2022). From an economic standpoint, crucial to the outlook is the belt and road initiative and the drive to pursue productivity and efficiency. To make the next stage of China’s economic development a reality, there is a need to upskill the population and provide opportunities for them to move into higher paid positions that will not only aid growth in total household income and wealth, but also see it distributed more equitably. Also crucial to the outlook is the broad array of financial and regulatory reforms that are in motion in China. These include, but are not limited to, improving the structural health of the banking and financial system; targeted deleveraging in some sectors; the aligning of foreign investment by Chinese nationals to the nation’s objectives; protecting households’ wealth and developing greater awareness of the risks associated with investments and debt; as well as the need to deepen capital account convertibility and financial market capacity. 

Also on China, it is worth quickly highlighting the latest China property price report. In recent months, we have seen a broadening of price declines across the 70 cities that report. The vast majority of cities are still experiencing price gains, but authorities’ actions are clearly being felt more. Arguably, officials are trying and target a period of price stability on average across the nation. That will mean some markets see modest price declines (after a very strong run up) while other less-developed regions continue to experience gains. 

For Australia, the more important point to highlight is the clear downtrend in residential investment growth which, if sustained, will weigh on commodity prices and potentially demand. Together with the continuing downtrend in public and private business investment, softer residential investment supports our view that growth in China is set to slow, from 6.8% in 2017 to 6.2% in 2018. 

Finally in Europe, the October ECB meeting delivered long-awaited detail on the plan to taper asset purchases in 2018. Broadly the decision was in line with our expectation. €30bn in purchases will occur per month from January to September 2018, down from €60bn per month in 2017. Further, President Draghi was at pains to highlight that the majority of the Council regarded the new program as open ended. To our mind, that speaks to another extension past September 2018, likely only for three months at around €15bn to smoothly phase out purchases. All things considered, it is likely that the ECB will find it much more difficult to justify balance sheet reduction and/or an increase in their policy rate (the refi rate) than in the US. The ECB’s inflation forecast of just 1.5%yr in 2019 speaks to the substantial degree of slack that remains in their economy as well as the slow progress being made. We do not foresee any meaningful policy tightening in the Euro area over the forecast period, and would argue that risks to the outlook are skewed to the downside."