By Lucinda Jerogin, Associate Economist at CBA:
- It was a quiet week in Australia with a dearth of data releases.
- News offshore was dominated by trade headlines as US-China tensions flared and subsequently cooled. The US Government shut down continued.
- Next week locally all eyes will be on the all-important quarterly CPI ahead of the November RBA Monetary Policy Board meeting. Trade prices and private sector credit are also due.
- Abroad, US President Trump will meet Chinese President Xi on Thursday in Korea. Four central banks meet. We expect the FOMC and BoC to cut rates by 25bp. By contrast, the BoJ and ECB are likely to keep rates on hold.
The data flow was light on last week in Australia. In the absence of any ABS data releases, local analysts’ attention was squarely on international news.
On Tuesday, President Trump and Australian Prime Minister Anthony Albanese signed a pact to boost the US’s access to rare earth and other critical minerals. The deal will have the US and Australia invest more than $US 1bn over the next six months on initial projects and comes in response to China’s tighter export controls on rare earths recently.
In other trade news, US-China trade tensions dominated headlines ahead of the hotly anticipated Trump-Xi meeting and the 1 November deadline for the additional 100% tariff on US imports from China.
President Trump expressed optimism that the in-person meeting, scheduled for Thursday this week, would yield a ‘good deal’. In our view, the US and China will remain fundamentally at odds in the long-term struggle for global economic and military hegemon.
However, significant economic costs will likely prevent the two countries from escalating tensions too far. As such, we consider an extension to the deadline for a deal as the most probable outcome.
In addition, US President Trump announced sanctions on Russia’s two largest oil companies on Thursday in a bid to pressure Russian President Putin to end the war in Ukraine. European Union countries followed suit, reaching an agreement on a new package of sanctions targeting Russia.
Closer to home, the US and India edged closer to a trade deal. The agreement would lower US tariffs on Indian imports from 50% to 15%-16%, conditional on the reduction of Indian imports of Russian oil and opening India to more US exports of non-genetically modified American corn and soymeal.
Turning our attention to the week ahead and the domestic data flow ramps up.
The focus will be on the all-important quarterly inflation print. We expect headline CPI rose by 1.1%/qtr in Q3 25, lifting the annual rate to 3.0%/yr. The more policy-relevant trimmed mean measure is expected to have increased by 0.8%/qtr to see the annual rate remain unchanged at 2.7%/yr. However, rounding could easily see a 0.9%/qtr and 2.8%/yr upturn.
Looking to the November RBA Board meeting, our base case remains for an on-hold decision. Given the cautious and gradual pace of easing so far this cycle, we expect the Board will want to see clear evidence that inflation is continuing to move towards the mid-point of the target band before easing monetary policy further.
However, the latest labour force data has made the decision to hold or cut in November less clear cut. To see the RBA cut in November, the Q3 CPI would have to be unexpectedly soft or the RBA’s reaction function to the labour market data would be larger than our expectations.
Despite this, we remain comfortable with a hold in November, with the balance of risks to our Q3 25 trimmed-mean estimate being clearly tilted to the upside.
Other economic data releases next week include trade prices and private sector credit.
Abroad, four major central banks meet. We expect the FOMC and BoC to cut rates. In the US, the emerging weakness in the labour market will encourage the Fed to cut the Funds rate by 25bp.
Up north, the Canadian economy remains under pressure from trade tensions, softer US demand, and weak population growth. We expect the BoC will stay focused on the downside risks to growth and the labour market rather than upside risks to inflation, prompting the BoC to cut rates by 25bp to 2.25%.
By contrast, the BoE and BoJ are forecast to leave rates on hold. In England, inflation sits close to the ECB’s 2%/yr target and the Eurozone labour market remains in good shape.
Officials in Japan remain cautious about the impacts of US tariffs on the economy. In addition, the BoJ is likely to refrain from hiking interest rates until Prime Minister Takaichi’s economic stimulus package has been passed through the parliament and the flow on effects to inflation are clearer.
