Three interesting news reports for Australian investors published in the past 24 hours - none of which will be a major surprise to regular readers of The WIRE
The news items are as follows:
1. Australian inflation up sharply in the December Quarter 2015
Australian CPI data released yesterday showed prices rose an average 0.4% in the December quarter, and 1.7% over calendar 2015. This is still a long way below the RBA’s 2-3%pa target, but it is reason enough to give the RBA pause before cutting rates at their meeting next week. A cut was unlikely next week anyway, but now very unlikely. The RBA will want to see the impact of the falling AUD on inflation and with all of the noise from energy and other commodity prices in recent months, they can’t yet get a clear view of that.
We believe the global outlook for inflation is very benign due to the enormous excess manufacturing capacity in China and the US in particular, but we maintain the view that Australian inflation faces upward pressure driven by the rising costs of imports while the AUD is falling. The reason it has taken a year or so for this impact to flow through is that it takes several months for importers’ inventory bought at higher AUD levels to be used up and for currency hedges to roll off. Now the full price impact of the falling AUD will be felt on imported goods, and once energy price falls peter out, inflation could jump higher in Q2 and Q3 of 2016.
2. The US Federal Reserve left rates on hold
Hardly a surprising decision, but the market’s reaction was more interesting. Commentators seemed to be surprised by the Fed’s comments that they were concerned about the global economy, and US equities fell on the news. It’s far more likely that the Fed reminding equities markets that the world economy is unhealthy added to their jitters and ended the small recovery in confidence. It’s hard to imagine how anyone could be surprised the world economy faces an uncertain 2016.
The next news out in the US is their first estimates for GDP growth in 4Q15. The market is still expecting 1.4% (annualised), but we believe the rate will be about half of that at 0.7%. Falling inventories, manufacturing and retail spending data indicates this lower than expected rate. The market’s expectation for a higher GDP rate may cause yields to fall further on 29 January US time. That said, long term rates in the US are currently around 2.00%pa (for the 10yr bonds) and therefore at our fair value levels. Investors would be better placed waiting for volatility to temporarily push yields back up and then buy.
3. Future Fund shifts to a 20% cash position, at near record levels
Australia’s Future Fund is not afraid to shift heavily into cash when they see too much risk and/or not enough return in equities markets. Yesterday they announced that they are at their highest cash position since July 2008, just months before the GFC. The Future Fund has reduced its equities holdings from 39% to 31% of its portfolio on the basis that investors are not being adequately compensated for an increasing number of risks in global markets.