Higher than anticipated inflation in Australia and a jump in confidence in China’s manufacturing sector fuelled a drive towards the Australian dollar. The CPI data out of Australia has reignited a debate on whether the RBA will cut the official cash rate in November. Prior to the data the market was more-or-less certain that the RBA would lob another 25bps of the headline cash rate. But the surprise jump in core consumer prices to the middle of the RBA’s target range thrusts inflation further onto the RBA’s radar.
Is there scope for another rate cut by the RBA in November?
Looking at the headline figure it is not hard to see why some investors have changed their tune. At 1.4% for the quarter, CPI was almost three times the prior period, putting core CPI, what the RBA looks at, squarely in the middle of the RBA’s 2-3% target range. Behind the surprisingly higher CPI figure was a 15.3%, 6.6% and 4.5% rise in electricity, international holiday and travel accommodation and medical and hospital services, respectively.
However, once the carbon effect, which may be as high as 0.6-0.7% and is expected to dissipate during this quarter, is taken out the numbers look much more reasonable. This would put core CPI at a much more comfortable level, allowing the RBA to cut the official cash rate in November. Looking at the other factors that come into play for the RBA when it decides on the official cash rate, we also see scope for another rate cut, albeit it is going to be a close call. Futures markets agree with this assessment, with around 60% of participants looking for a rate cut in November, down from around 80% prior to today’s CPI data.
On the back of the inflation data the aussie jumped above to 1.0300 against the dollar, before getting another boost from manufacturing data out of China. Combined, these factors helped propel AUDUSD to a session high of around 1.0320. However, the push higher on the back of Australia’s 3Q inflation data has created severe downside risk if the RBA moves to ease monetary policy in November, which is compounded by long-term fundamental weakness in the aussie due to Australia’s relatively weak terms of trade.
Is Q4 the quarter for a rebound in economic growth in China?
Flash manufacturing PMI data for China today printed at a three month high, but remained in contraction territory. It is encouraging that new orders are at a 4-month high and output also pushed higher. However, with external threats to economic growth in Chian still present in Europe and other parts of the world, the risk of a further slowdown still exists.
Overall, taking into account these threats to growth from aboard, the willingness of the PBoC to ease policy will be the critical factor for economic growth going forward.
AUDUSD – daily