Tuesday, October 25, 2011

A good CPI gets that little bit more likely

ANZ prediction
Australian shares have gained $35 billion and the dollar has hit a six-week high amid hope of a workable stability plan for Europe and news of a boost to manufacturing in China.

Manufacturing in China hit a five-month high in October according to the usually-reliable HSBC purchasing managers’ index. The index stood at a preliminary 51.1 in October, up from 49.9 in September and the first time it has gone above the neutral level of 50 since June.

The final PMI reading for October will be released as Australia’s Reserve Bank board meets to set internet rates on Melbourne Cup Tuesday, November 1.

HSBC economist Qu Hongbin said the news suggested China’s economy would escape a hard landing, despite slowing export growth and tighter credit conditions.

The turnaround was led by export orders, most likely to the United States after the settlement of its debt ceiling crisis.

“It gave the currency a kick along, taking it past 104 US cents,” said CMC Markets dealer Tim Waterer. The Aussie dollar closed up one and a half cents.

The S&P/ASX200 index climbed 113.1 points, or 2.73 per cent, to 4,255 points. The All Ordinaries index climbed 110.2 points to 4,313.6.

Markets were also optimistic about a settlement of the European debt crisis this week with eurozone leaders scheduling another meeting for Wednesday. “We haven’t got the result at this stage, but it appears from the rhetoric they are progressing in the right direction,’’ said Mr Waterer.

At home the odds of a Melbourne Cup Day interest rate cut advanced with the release of a benign-looking producer price index.

Traditionally released two days ahead of the consumer price index, the index showed prices rising at a quarterly pace of 0.6 per cent and an annual rate of 2.7 per cent...
The results are well down on the June quarter readings of 0.8 per cent and 4.3 per cent, and suggest producer prices will add little to consumer inflation.

But the relationship between the two indexes has become loose in recent years as consumer prices have increasingly come to depend on wages and margins as well as the price of inputs.

Domestic producer prices climbed 0.7 per cent in the quarter and imported prices were flat after falling 19 per cent since the first quarter of 2009 as the Australian dollar rose.

House construction costs, heavily represented in the consumer index, fell 0.2 per cent in the September Quarter. Utility charges jumped 8.2 per cent as annual increases kicked in. Encouragingly the increase was below the 8.9 per cent recorded in the 2010 September quarter.

“We have raised out headline CPI forecast to 0.7 per cent, but cut our underlying inflation forecast to 0.6 per cent,” said RBS economist Kieran Davies. “A 0.6 per cent result would probably see the Reserve Bank cut.”

The Bank believes interest rate settings are mildly restrictive and will return them to a more neutral setting if Wednesday’s CPI result allows it point to continuing low inflation.

Published in today's SMH and Age

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