In what a lesser market participant might call a terrifying week of awesome significance, it is with no trepidation that I draw attention to the Australian June quarter Core Price Inflation (CPI) data due to be released today.

Market forecasters are saying annual CPI growth will rise from 5.1% to 6.2% – 6.3% and it’ll have grown by 1.8% in the last three months, from the 2.1% it grew during the first quarter.

Westpac is now putting the Reserve Bank of Australia’s Official Cash Rate (OC) up to 3.35% by February next year – which for people who prefer I do the math – is a full 2% above today’s 1.35%.
 

The CPI with nowhere to hide

It’s an easy data drop to miss – that bastard is crammed right in there during a monster week of US earnings reports starring the FAANG five and a bunch of other major US companies and Thursday morning’s 4am (AEDT) incredibly significant Federal Open Market Committee meet, and the critical US June quarter GDP numbers.

Yep. The Americans have enough on their plate.

Lots of them reckon this is the biggest week of forward determining economic data – since time began.

Tense Wall Street markets came out mixed overnight as the reality of a week which features earnings reports from almost a third of the S&P 500, – including five of the truly “mega cap” techs – has analysts thinking it’s the week that’ll make or break them for the rest of the year.

US investors have far from been convinced that an economic recession is avoidable, and if they could have one wish right now it’d be that they can just hold through this week’s data news storm and allow the Fed Reserve members wait until they’ve chilled a bit at Jackson Hole in August. Then hopefully declare they’ve sorted inflation and are easing off of their hawkish stance on the price of money.

But for that to happen this week’s numbers have to fall right into place.

Looking at the state of the United States, their heaving economy is but a few percentage points from hitting the technical requirements for the textbook definition of recession – two straight quarters of negative growth. We’ll know when we wake up Friday morning.

Should inflation be right up at those toppy levels, then that’ll spark the biggest recession catalyst of all – J Powell and Co. at the Federal Reserve continuing their aggressive approach to lifting interest rates.

Always looking for a glass with something in it, UBS told clients that a very strong US CPI and an upside surprise on core CPI should harden FOMC rate hike intentions.

“But so far the muted equity market response shows expectations are already low. Markets are focused on recession risks, so good news is likely to be treated as such.”

Not making anything clearer, Treasury Secretary Janet Yellen said overnight “we just don’t have” the economic environment consistent with recessionary conditions.

 

Our numbers and what they bring

But first up at home, AMP Invest’s consistently senior economist Diana Mousina reckons that the forecast 1.8% increase in Wednesday’s headline inflation is on the cards.

“(This) would take annual inflation to 6.2% – the highest level since 2001 – driven by further rises in petrol, electricity, gas, food and new home construction costs.”

That’s heaps more than anyone was banking on around Christmas time.

Australia’s inflation adventure began ahead of the Q1 2022 read when it up and surged like a startled deer to 5.1% from a still benign – if a little wary – 3.5% in the previous qtr.

Looking back now, that read really did breeze on past market estimates of 4.6% and was the highest read since the intro of the GST (Goods and Services Tax) in July 2000.

That was when the price of random building materials – like the cost of timber – started to spike like a haemorrhoid. We couldn’t get round troubled supply lines which just seemed to be getting worse and we also started to accept the huge costs of filling the SUV wasn’t as momentary as chilled economists and analysts were saying.

“Transitory” was still the preferred word being tossed about. Ahh hindsight.

Those signals seem pretty goddamn obvious now.

Ripping through the Bureau of Stats data from last quarter, transport costs jumped by the most since Saddam invaded Kuwait in 1990 and triggered some geopolitically poor behaviour on the part of everyone except maybe the Kiwis and the French (13.7% vs 12.5%).

More of the upward pressures came from higher costs for getting a feed (and non-alcoholic beverages!) (4.3% vs 1.9%), residential housing (6.7% vs 4%), recreation and just having fun (3% vs 2.1%).

On a quarterly basis, consumer prices went up 2.1%, which was the most in three months since the 2000 Sydney Olympics, after a 1.3% gain in Q4.

The RBA Trimmed Mean CPI rose by 3.7% year on year, the fastest pace in 12 years, exceeding the midpoint of the central bank’s 2-3% target.

This week, AMP Invest and City Index expect core inflation or the “trimmed mean” – which takes a few of those accelerants out of the inflation equation – to rise by 1.5%, taking the annual rate to 4.7%.

That’s enough to worry about.

According to City Index, a firmer June quarter CPI number today, followed by a hawkish Fed on Thursday morning, would weigh heavily on the Reserve Bank’s decision making when the board meets next Tuesday.

“(It) would raise the chances that the RBA opts for a larger rate hike of 65 or 75bp.”

Mousina agrees, saying she expects the RBA to lift the cash rate by another 50bp at next week’s August meet.

“But if the trimmed mean is much stronger than we expect, a 75 basis point hike is a possibility,” Mousina adds.

Alan Oster and the National Australia Bank now believe the CPI release will show “further very elevated inflation”, in the wake of last week’s cracking jobless rate of 3.5%.

NAB says that’s a fall “too large to ignore”.

“We now expect the RBA to lift rates to 2.85% by the end of the year, which we consider to be around neutral if not mildly restrictive, and then to pause.”

Previously the bank had pinned its ears back for a Cash Rate of 2.35% by end 2022, with rates peaking at 2.6% in early 2023.

City Index’s Tony Sycamore says last week’s RBA minutes added an extra hint of a fresh “hawkish element” into the economic recipe.

Hovering over a printed version of the RBA minutes (red pen out), he notes the board said that the current level of the cash rate is well below the estimated neutral rate, thought to be at least 2.5%.

“According to City Index, currently, the interest rate market is 77% priced for a 65bp interest rate hike at next week’s RBA Board meet.”

That’d take the cash rate to 2%.

“The interest rate market then expects another 140bp of rate hikes in 2022, taking the cash rate to 3.4% by year-end,” he says.

Other price indicators the RBA is likely to take into account for next Tuesday include export and import trade figures for the June quarter (AMP expects an 11% lift in export prices and a 7% lift for imports), June quarter producer prices, June retail spending (AMP are looking for a slowing to 0.3% over the month) and June credit figures (AMP sees a 0.7% lift in credit growth).

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