Australian inflation was the main focus domestically this week with the headline consumer price index surprising to the upside of consensus coming at 0.9% in the December quarter against 0.7% anticipated, with the annual pace firming to 0.9% from 0.7% (reviewed here). Policy-related effects in response to the pandemic continue to be the main factor rather than a build-up of inflationary pressures generated by the economic recovery. Confirming this was another soft print on underlying inflation, with the RBA's preferred trimmed mean measure coming in at 0.42% in Q4, holding the annual pace to a record low of 1.19% for the second consecutive quarter.
Chart of the week
The main contributors to headline CPI in Q4 were the ending of the Federal government's provision of free child care services and excise tax increases on tobacco, while more modest contributions came from domestic travel as state borders reopened and increases in private health insurance premiums came through after deferrals earlier in the year. Meanwhile, a state government rebate on electricity bills in Western Australia resulted in utilities weighing heavily on CPI, while the Federal government's HomeBuilder scheme and additional incentives in some states held back what would have been a much stronger lift in new dwelling costs. Outside of these factors, there were few signs that the strong momentum the economy has established since reopening was sparking the inflationary pulse. But that should not come as a surprise given the presence of elevated spare capacity that was highlighted in last week's labour force survey for December (more here) with the unemployment rate at 6.6%, notwithstanding the significant improvement has occurred since the peak of the pandemic crisis.
With inflation continuing to run well below target and with labour market conditions still a long way from being repaired, the RBA is likely to reinforce the need for its accommodative policy settings to remain in place when the Board meets next Tuesday. With $50bn of purchases under the RBA's $100bn bond purchase program now completed, attention will be turning to what happens when the target is reached in early April. The RBA's calendar shows there will be no shortage of opportunities for the central bank to outline its thinking on the matter over the coming few weeks so Tuesday's meeting may provide few insights but given that the macro conditions will still be well short of the Board's stated focus on actual inflation and employment outcomes, an expansion of the bond purchase program shapes as the likely path. More generally, markets will be keen next week to gauge the Board's assessment on the economic recovery, which despite virus-related concerns emerging over the summer holiday period appears to be showing plenty of resilience.
The other highlight locally this week was the NAB's Business Survey for December that conveyed an upbeat tone with the conditions index advancing by 7 points to +14, making this its strongest reading since September 2018. This was driven by sharp improvements in trading conditions (+5pts to +20) and, more importantly, by employment (+13pts to +9) with surveyed firms indicating that hiring activity was robust. Going against this positivity was a pullback in confidence to +4 from +13, likely reflecting the effects of virus related-concerns in New South Wales, though that is likely to improve next month in line with the situation coming under control in early 2021.
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Turning to events offshore and while the market narrative was heavily focused around the surge in several US stocks leading to the well-publicised squeezes of short positions held over those names, there were plenty of macro-related developments to digest. The IMF this week upgraded its projection for global GDP growth in 2021 to 5.5% from 5.2% previously, reflecting the potential for vaccines and a stronger fiscal impulse to lift activity later on in the year. The group's earlier expectation for output to contract by 4.4% in 2020 was also revised to a 3.5% decline.
Growth in advanced economies is projected to rebound by 4.3% in 2021 after falling by an estimated 4.9% in 2020, with GDP returning to its pre-pandemic level by the end of this year. Driving the upgrade was a stronger profile for the recoveries in the US (5.1% in 2021 from 3.1%) and Japan (3.1% from 2.3%) on the back of additional fiscal support measures announced towards the end of last year. Incidentally, the IMF's outlook for Australia was revised higher to 3.5% in 2021 (from 3.0%) and 2.9% in 2022 (from 2.8%). Meanwhile, the effects of shutdowns in the UK and Europe are projected to weigh on their respective rebounds when those economies reopen. Forecast growth in the euro area for 2021 was cut by 1 percentage point to 4.2%, while the outlook for the UK slipped to 4.5% from 5.9%. Aside from uncertainties around new variants of the virus emerging potentially leading to the extension of containment measures, the IMF noted the key risks to its outlook were delays in vaccine roll-outs, social disunity, and policy support being withdrawn from economies too quickly. Also on the global stage was the World Economic Forum where the agenda focused on the need to reset policies to ensure greater inclusion, cohesiveness and sustainable practices as economies recover from the pandemic, though the events out of Davos gained little attention from the markets across the week.
In the US, the highlight of the week was the Federal Reserve's policy meeting with the FOMC leaving its existing stance unchanged, as widely expected. The main message from FOMC Chair Jerome Powell in the post-meeting press conference was that while there were positives around the outlook due to the vaccine roll-out and large-scale fiscal stimulus, a tapering in the run rate of its asset purchases from the current pace of $120bn/mth was not on the horizon with "substantial further progress" towards its inflation and employment goals still required. Here, the emphasis is on actual outcomes materialising in the data flow rather than being forecast to emerge by the Fed. Speaking of the data flow, the first estimate of Q4 US GDP growth came through this week lifting by 1.0%q/q (-2.5%Y/Y) after Q3's rebound of 7.5%. This took GDP to within 2.5% of its pre-pandemic level after it was crunched by 10.1% over the first half of 2020. Growth in household consumption slowed back to 0.6% in Q4 after surging by 9.0% in the previous quarter on the reopening, with services (1.0%) outperforming goods consumption (-0.1%) in contrast to the trend that has occurred since the onset of the pandemic.
Sentiment in Europe was dented this week by ongoing delays in the vaccine roll-out there amid discord between the European Union and AstraZeneca over delivery targets. On macro developments, reflecting the impact of the return to broad-based shutdowns the EU's Economic Sentiment Indicator (ESI) remained weak after falling to a reading of 91.5 in January from 92.4 in the month prior. The ESI's sub-components showed deterioration in retail conditions and in the confidence levels of consumers and services industries. On the policy front, comments from ECB Governing Council member Klaas Knot made headlines by saying that there was still scope to cut rates further from the current -0.5% setting—an outcome widely thought to be an unlikely move by the markets, not least because the central bank has favoured asset purchases and liquidity facilities in its pandemic response. In a heavy week for European equities, banking stocks underperformed falling in the order of 5%.
