Main Themes: The FOMC meeting revealed greater confidence that inflation would pickup, but the news did not appear to come as a major surprise to markets.
Share Markets: The Dow and S&P500 indices both gained 0.3% overnight, recovering from a dip late in the session after the Fed’s FOMC meeting.
Interest Rates: The upgrade in the Fed’s assessment on inflation saw US 2 –year yields lift 2 basis points higher to 2.14%, although 10-year yields were little changed. Markets have virtually fully priced in a US rate hike for March.
Foreign Exchange: The US dollar index slid earlier on in the session but then recovered most of its losses following the Fed’s statement. The Australian dollar recovered from a post-CPI slump, but then ended slightly weaker for the session. It is currently trading at close to 80.6 US cents.
Commodities: Oil prices edged slightly higher, despite a lift in US inventories. Prices of other commodities also rose, including gold and copper.
Australia: CPI inflation remained low in the December quarter. Annual growth in headline inflation edged up to 1.9% and the underlying annual growth rate was steady at 1.9%. A strong increase in the oil price over the quarter led to higher prices for automotive fuel (10.4%). Price growth was also high in tobacco (8.5%) reflecting the continued impact of the increase in the federal excise tax at the beginning of the September quarter. Despite large price increases in some areas, overall inflation was muted. Crucially, both outcomes remain below the Reserve Bank’s 2-3% per annum target band. Inflation is expected to remain low over the medium term. The RBA is not anticipating annual underlying inflation to return to its target band until June 2019.
Private sector credit grew just 0.3% in December, following growth of 0.4% for two consecutive months. The annual pace of growth slowed from 5.2% in November to 4.8% in December, the slowest since May 2014. Much of the slowdown in credit growth reflects weaker conditions in the housing market. Housing credit grew 0.4% for a 6.3% annual gain. That was the weakest annual rate in a year. In particular, growth in credit for investor housing has softened considerably.
China: The manufacturing PMI edged down to 51.3 in January, from 51.6 in December. It was the 19th consecutive reading above 50, signalling ongoing expansion in manufacturing activity.
The non-manufacturing PMI rose to a four-month high of 55.3 in January. It is also above 50, indicating conditions are improving in the non-manufacturing sector.
Europe: The unemployment rate was steady at 8.7% in December from January.
Inflation remains low at an annual rate of 1.3% in the first estimate for January. It was down from 1.4% previously, but above expectations of 1.2%.
Japan: Industrial production was stronger than expected, rising by 2.7% in December, following an increase of 0.5% in November. For the year to December, industrial production lifted 4.2%, up from 3.6% previously.
United Kingdom: GfK consumer confidence rose to a reading of -9 in January, from -13 in December. The result was above consensus expectations and was the first increase in four months.
United States: The Federal Reserve’s FOMC left interest rates unchanged as widely expected, but continued to lay groundwork for rate hikes later in the year. Its next March meeting is the next live date in which a rate hike is expected. The key change was an upgrade in its language around inflation, presenting greater confidence that annual inflation was “expected to move up this year” towards its 2 percent goal.
ADP private payrolls rose a solid 234k in January. Gains have exceeded 200k in five of the last six months. The strength in recent months points to a further tightening labour market, and bolster expectations for a strong report on Friday for the non-farm payrolls report.
In other data, the Chicago PMI fell from a revised 67.8 in December to 65.7 in January, but is still pointing to strong activity.
Pending home sales rose 0.5%, in line with expectations, pointing to slightly stronger sales. Low inventories are expected however, to restrain activity.
Today’s key data and events
NZ ANZ Job Ads Feb prev -0.3% (8am)
AU AiG Perf of Manufacturing Jan prev 56.2 (9:30am)
AU CoreLogic House Prices Jan prev -0.4% (10am)
AU Trade Price Indices Q4 (11:30am)
Import Prices exp 1.5% prev -1.6%
Export Prices exp 3.0% prev -3.0%
AU Building Approvals Dec exp -8.0% prev 11.7% (11:30am)
JN Nikkei Mfg PMI Jan final prev 54.4 (11:30am)
CH Caixin Manufacturing PMI Jan exp 51.5 prev 51.5 (12:45pm)
UK Nationwide House Prices Jan exp 0.1% prev 0.6% (6pm)
EZ Markit Manufacturing PMI Jan final exp 59.6 prev 59.6 (8pm)
UK Markit Manufacturing PMI Jan exp 56.5 prev 56.3 (8:30pm)
US Markit Mfg PMI Jan final exp 55.5 prev 55.5 (1:45am)
US Construction Spending Dec exp 0.4% prev 0.8% (2am)
US ISM Manufacturing Jan exp 58.6 prev 59.3 (2am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are house forecasts and for other countries are consensus forecasts.
Janu Chan, Senior Economist