11 November 2022
Key Points
- Reserve Bank revises inflation forecasts
- US CPI index
- China’s producer price index falls
- Current investment opportunities
Australia
The Reserve Bank (RBA) has released its November Statement on Monetary Policy (SoMP), with revised forecasts for growth, unemployment and inflation. Due to a lift in inflation in the September quarter inflation report, the Bank has lifted its forecast for headline inflation in 2022 from 7.8% in the August SoMP to 8%. The forecast for inflation in 2023 has also been revised from 4.3% to 4.7% and 2024 from 3% to 3.2%.
In a speech on Wednesday night, RBA deputy governor Michele Bullock said forecasting is becoming increasingly difficult amid ‘unexpected shocks and that forecasting was a crucial part of the monetary policy process as the RBA board needed to form a view on how its policy decisions might impact the economy and inflation in the future.
Bad weather and energy prices, which the RBA said couldn’t have been predicted, also led to an adjustment in its expectations for economic growth and inflation.
“Retail prices of electricity and gas have increased by 10%–15% since the middle of the year, with much of this effect to come through in the December quarter CPI. This is consistent with our expectations a few months ago. Since then, however, we’ve learned that larger electricity and gas price increases than previously assumed are now likely in 2023,” Bullock said.
“We now expect headline inflation to peak around 8% at the end of 2022.”
Global
The US consumer price index (CPI) showed the prices paid by urban U.S. consumers for a basket of items cooled down in October, a sign of relief that the Fed’s hawkish monetary policy is coming to an end.
Risk assets reacted positively to the US CPI release, with equities and bonds rallying following the lower-than-expected print for October. US CPI increased 7.7 percent for the 12 months ending October, a decrease from 8.2% in the prior month and represented the smallest annual increase since the period ending January 2022. Core CPI (ex food & energy) rose 0.3% month on month (est. +0.5%) and increased 6.3% on an annual basis (est. 6.5%) which was a decrease from 6.5% in September.
US treasuries rallied across the curve, with the 2yr yield falling to 4.33% (-25bp) and the 10yr decreasing to 3.84% (-24bp). Eurozone and UK yields were all lower in response to news out of the US, with 10yr Gilts decreasing to 3.28% (-16bp) and10yr Bunds falling to 2.00% (-16bp).
The larger than expected deceleration strengthened a market view that inflation may have now peaked and that the Fed may start to slow the pace of tightening following four consecutive 75 basis-point interest rate hikes. Equities posted gains, the S&P 500 was up 4.80% late in the day and the NASDAQ was up 6.46%, with tech, consumer discretionary, real estate, and communications the strongest performing sectors of the S&P 500.
Outside of the US, China’s producer price index (PPI), which reflects the prices that factories charge wholesalers for products, fell by 1.3 percent in October, reversing from a 0.9 percent increase in September. The price falls indicates a sluggish economic environment, amid soft demand, disruptions from China’s zero-Covid policy and declining commodity prices.
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