Australia | Oct 26 2009
By Chris Shaw
With the Australian market’s focus being on the outlook for interest rates now the Reserve Bank of Australia (RBA) has begun the rate hike cycle, today’s Producer Price Index (PPI) numbers were seen as an important lead-in indicator for the Consumer Price Index (CPI) data out later this week.
The number actually fell short of market expectations, recording a rise of 0.1% for the September quarter against consensus estimates of an increase of 0.3%. Westpac, which had forecast an outcome of 0.2%, notes the annual headline PPI rate stands at 0.2%, which is down from 2.1% previously and represents a new low for the series that dates back to 1998.
Commonwealth Bank economist James McIntyre pointed out the stronger Australian dollar was the key driver of the subdued reading, noting while domestic output prices rose 1.0% in the quarter this was offset by a 5.1% decline in imported prices.
In his view the data suggests there has been a moderation in price pressures at the producer level, as with output prices declining by less than the fall in inputs it implies an easing in margin pressure. This could flow through to some downside risk at the margin for the CPI data, though McIntyre notes key categories such as goods, electricity and energy prices rose and this trend should also be evident in the CPI numbers.
Post today’s PPI numbers, Westpac has not adjusted its above consensus forecast for the CPI of an increase in the headline number of 1.1% and in the underlying number of 0.9% for the September quarter, which is a little above the estimates of ANZ Banking Group economist Dr Alex Joiner, who is forecasting a 0.7% increase in the headline number and a 0.8% jump in the core measure.
Joiner agrees with CBA’s McIntyre that today’s data diminishes somewhat the upside risk to market expectations with respect to the CPI number on Wednesday, which he too suggests will be a key focus point with respect to determining the outlook for interest rates in the short-term. McIntyre retains his view the RBA will hike rates by at least 0.25% when it meets next week, while a stronger than expected CPI number this week would add weight to the argument for a 50-basis point move.
The market doesn’t appear to be adjusting its expectations from a 0.25% rate hike in November as yet, as Wetpac notes the Australian dollar was little changed post the release of the PPI number, falling initially before strengthening on the realisation the underlying numbers were strong.
The bank suggests the Aussie dollar is looking a little tired at present while the US dollar is giving some indications of moving higher in coming sessions, so it suggests strength in the Aussie dollar above the US92.5c level looks like a selling opportunity in the current environment.