The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, April 18, 2011

Big week for RBA watchers...

In advance of CPI next week, we have a lot of important partial data, and the RBA Board Minutes. The two keys in the RBA Minutes will be (a) any quantification of the impact of Japan on Q1 (down) and Q2 (middling?) GDP, and the Board's views on the effects of the Aussie dollar on inflation. (Note that both the AUD/USD and the Trade Weighted Index are up near all-time highs.)

We know deflationary-pass-through has been much greater than the RBA (and most economists) originally expected. Will the Board draw attention to the exchange rate-monetary policy trade-off, or will it de-emphasise this in view of (a) the circularity of the logic, and (b) the risk that the exchange rate is going to depreciate over the next 12-18 months--reversing out recent benefits--with adverse consequences for domestic price pressures. Another conundrum for the RBA.

We then get import prices and export prices, where the key will be, again, the influence of the AUD on import prices, and the extent to which this is driving some domestic deflation.

Finally, we have the (wholesale) producer price series, which is price stage preceding retail consumer prices. Of interest here is whether overall producer prices are starting to rising robustly again in the face of oil and food price shocks, potentially imported price increases from China, and higher labour costs. The market expects a healthy 1% increase for the quarter, but it easy to see risks to this number in both directions.

By the end of the week, all the major economists will have finalised their CPI forecasts. Today, most are expecting a benign core CPI print of around 0.6% for the quarter, which many think gives the RBA more time, combined with a nearly twice-as-large headline print hoisted by the supply-side food and oil price shocks wrought by local natural disasters and the Middle East discord.

If core CPI prints low, nobody will be especially surprised given that this will just continue what we have seen for the last few quarters. This then makes a higher core the real curve-ball. While lower probability, a spike in core will be a complete "game-changer" for the domestic economic debate. It will have come way to early for the RBA, bank economists, and financial markets. Most are not projecting another hike until the third or fourth quarters. A high core will radically increase the likelihood of hikes in May and June. To be clear, this is not the base-case, but rather an interesting lower probability case.

Another interesting question that will be resolved with the passage of time is the number of hikes left in this cycle. Westpac have long believed that the RBA has done most of the work, with only 1 or 2 increases left. Westpac's view on consumer conservatism and the squeeze on household budgets has probably been best-in-market. Then again, Westpac have access to the best household survey data. Macquarie are also in this relatively dovish camp. At the other end of the spectrum are the likes of RBS and JP Morgan, which foresee another 3-4 hikes. All the hawks have been blind-sided by the weakness in retail sales and inflation during 2010-11, which is in part explained by the influence of the currency. Combined with the effect of countless natural and non-natural disasters, the hawks have been compelled to consistently shift out their rate hike profile.