Aus inflation

A poor set of numbers, on the inflation front. Monthly CPI sitting at 4%, above consensus for the 3rd month in a row, the progress made to date stalling out (let your eyes take in the graphs below marked “monthly”).

If we take annualised measures of the monthly core data (shown below, right hand side) it remains “too hot”, although perhaps the downward trend is still sufficiently apparent. But of course annualising monthly data isn’t a great idea…

…however the 3 month annualised data, particularly core, is still too hot, and has less angles to feel optimistic about.

The odds of the RBA recommencing the hiking cycle are now meaningfully higher.

We think this is quite a dangerous development. Given the persistently stronger than desired inflation prints, AND the recent state + government tax cuts and subsidies flowing through, it would seem the RBA might need to add another percent to the cash rate.

If so, it seems likely that longer dated bond yields will rise, although by less than the cash rate, resulting in a more inverted yield curve, and, given some pockets of weakness in the economy (particularly those areas most impacted by rate hikes, like building, construction and the retail sales that come from housing and housing related activities) the likelihood of a hard landing is rising.

The market absolutely did not like it, the 10 year yield rising alongside the AUD, with the market and duration sensitive property moving lower. Most GICS sectors are lower, with consumer discretionary the worst performer.

At least up until April, the consumer has been stronger than we expected, although the recent downgrades in several retail names suggests April/May/June is feeling this pinch, which will only become more acute if the RBA resumes hiking.

Restating that last line, to really point to the overall complexity here, we’ve heard from a number of companies that activity really fell away in April-May & that’s carried on into June, & we are only one or two poor employment prints from upsetting the narrative here (which has shifted to “inflation too hot!” again).

August is shaping up to be a very challenging results season.

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