Fruit prices plunge; Manufacturing shrinks; $A soars
Weekly petrol prices; TD Securities monthly inflation gauge
- Inflationary pressures ease. The
TD Securities-Melbourne Institute monthly inflation gauge rose by 0.3
per cent in April or 3.6 per cent over the year. The trimmed mean
(underlying rate) rose
by 0.2 per cent in April with the annual rate easing to a seven-month
low of 2.3 per cent.
- Fruit & veg prices slump. According to TD Securities, fruit and vegetable prices fell by 12 per cent in April after rising by 11.3 per cent in March.
- Manufacturing contracts.
The Performance of Manufacturing index stood at 48.4 in April. Any
reading below 50 indicates that the manufacturing sector is contracting.
- Aussie dollar soars. The
Aussie dollar hit a 29-year high (since January 27 1982) of US$1.10
this morning, putting more pressure on manufacturers, exporters, tourist
operators and even investors.
What does it all mean?
- The
Reserve Bank Board can rest easy – inflation remains under control. The
latest monthly inflation gauge shows that the key underlying rate of
inflation is still in the lower end of the Reserve Bank’s 2-3
per cent target band.
- The
recent spike in the headline rate of inflation was wholly due to higher
fruit and vegetable prices and the higher cost of petrol. But there are
now positive signs that headline inflation has peaked. Fruit
and vegetable prices soared by over 11 per cent in March, but they fell
just as spectacularly in April, slumping by 12 per cent.
- The
latest update on prices shows how misguided some commentators have been
on inflation, and the implications for interest rates. Some have
believed that the Reserve Bank should be rushing to lift rates, despite
the fact that the central bank said it would look-through the
flood-induced lift in fruit and vegetable prices.
- The
simple fact is that underlying inflation remains tame because consumers
aren’t spending. Add in the fact that the high Aussie dollar is causing
pain to manufacturing and that house prices are slumping, and
it is clear that there is no reason for the Reserve Bank to touch
interest rates.
- A
higher Aussie dollar is considered a positive development. But clearly
that’s not the case for manufacturers, exporters, tourist operators and
even investors. Foreigners own 40 per cent of Aussie shares, and
as the Aussie dollar continues to soar, this causes fund managers to
become over-weight Aussie equities. As a result, the high Aussie dollar
is causing foreign investors to trim holdings on Aussie shares and place
on hold future purchases of our equities.
What do the figures show?
Inflation gauge:
- The
monthly inflation gauge rose by 0.3 per cent in April after lifting by
0.6 per cent in March and by 0.2 per cent in February. The annual rate
of inflation eased from 3.8 per cent to 3.6 per cent.
- The
underlying rate (trimmed mean) rose by 0.2 per cent in the month,
dragging the annual rate to a seven-month low of 2.3 per cent.
- Excluding
volatile items like petrol and fruit & vegetables, the inflation
gauge rose by 0.5 per cent in April with the annual rate edging up from
2.1 per cent to 2.2 per cent.
- TD Securities noted that “Contributing
most to the overall change in April was a seasonal price rise for
health services, as well as increases in overseas holiday travel and
accommodation prices, and a small
rise in automotive fuel. These were offset by a substantial fall in
fruit and vegetable prices, and smaller falls in audio, visual and
computing, and household supplies. The price of fruit and vegetables
slumped by 12 per cent in April, following the 11.3 per
cent rise in March. The price of rent rose 1.2 per cent in April, the
highest monthly increase recorded since January 2009.”
Performance of Manufacturing (PMI):
- The
PMI rose by 0.5 points to 48.4 in April. However any reading below 50
signifies that the manufacturing sector is contracting.
- Seven of the 12 manufacturing sub-sectors reported declines in activity in April led by transport equipment and textiles.
What is the importance of the economic data?
- The monthly Performance of Manufacturing Index
is the Australian equivalent of the US ISM manufacturing gauge. The PMI
is one of the timeliest economic indicators released in Australia. The
PMI is useful not just in showing
how the manufacturing sector is performing but in providing some sense
about where it is heading. The key ‘forward looking’ components are
orders and employment.
- The TD Securities/Melbourne Institute Monthly Inflation Gauge
is designed to “provide a timely and accurate monthly measure of
inflation in Australia”. The Bureau of Statistics only releases the
Consumer Price Index on
a quarterly basis.
What are the implications for interest rates and investors?
- It
is right for the Reserve Bank to be watchful on inflation, but it would
benefit no one if it was to over-react to factors outside its control
by lifting interest rates.
- It
is clear that underlying inflation remains solidly under control and
there are also signs that headline inflation may have peaked with fruit
and vegetable prices sliding in April.
- Manufacturing
is going backwards, and it is highly likely that equivalent gauges for
the services and construction sectors to be released this week will show
similar results. We expect the Reserve Bank to stay
on the interest rate sidelines until at least August.
- The Aussie dollar could easily reach US$1.15 in the short-term given the benign neglect for the greenback by US policymakers.
-
|