The ASX hit a new 20-day high today.
The S&P/ASX200 gained 7.90 points or 0.12% to 6,806.50. Over the last five days, the index is virtually unchanged but is down 8.57% for the last year to date.
Top-performing stocks in this index are Costa Group Holdings Ltd up 11.21% and GUD Holdings Ltd up 5.37%.
Of the sectors, only Utilities (+2.48%) and Real Estate (+2.30%) made any meaningful gains. Most other sectors were flat. Consumer Staples was the biggest loser down 2.34%.
CPI rises ... could be bad for the cash rate
Yesterday, Reuters released a poll of economists who had predicted today’s CPI numbers to rise by 1.6% up from 1.8% in the June quarter.
However, September quarter CPI figures have exceeded expectations … and that’s not a good thing in a high inflation environment.
Headline CPI rose 1.8% on-quarter and 7.3% on-year, compared with the forecast 7%.
The Trimmed Mean CPI added 1.8% on-quarter and 6.1% on-year versus 1.5% and 5.5% expected by economists, while the Weighted Median rose 1.4% on-quarter and 5% on-year versus expectations of 1.5% and 4.8%.
The higher-than-expected numbers, now bring into question the Reserve Bank of Australia’s (RBA) next cash rate move.
The RBA was expected to raise the rate by 0.25%.
However, some analysts are now predicting a 50-basis points hike.
Goldman Sachs (NYSE:GS) Australia chief economist Andrew Boak sees it that way, but he is one of few.
AMP Capital believes the RBA will stick to a 0.25% rise, saying that goods contributed to 75% of the annual rise in prices and goods inflation should come down in 2023 - a trend occurring in the US.
Services inflation was 5.1% which senior economist Diana Mousina said was "far too high, especially as wages growth is expected to rise from here".
Moody’s Analytics said while Australian inflation was worryingly high, it was not enough for the RBA to go the bigger hike.
"We are slightly more optimistic – we see price growth peaking in December and then moderating to less than 3% by early calendar 2024," economist Harry Murphy Cruise said.
"This outlook is predicated on government policy mitigating potential electricity and gas price rises through calendar 2023 – that’s no guarantee."
Murphy said a 50 point hike in November would be premature.
"Flipping back to 50, after October’s 25-basis point hike, may be premature," he said.
"The lag for rate hikes to make their way through the economy is long and frustrating.
"There are signs that the first hikes, from May and June, are starting to dampen domestic demand – particularly through the leading indicator for the labour market, new job ads.
"We expect 25-basis point increases in November and December, taking the cash rate to a peak of 3.1%."
The CBA pointed to lagging indicators in its summary, saying that the RBA’s hikes between May and October will have had no impact on the June to September quarter.
"Indeed the rapid recent rate hikes and our expectation of some further modest tightening is unlikely to shift the inflation needle over the December quarter," CBA's head of Australian economics Gareth Aird said.
"The impact of policy tightening will impact consumer inflation in 2023."
Citi said the RBA would continue to increase the cash rate by 25 points for longer, rather than implementing another big hike.
"Inflation remains too high, with yearly headline inflation of 7.3% and underlying inflation of 6.1% both higher than consensus," Citi Australia chief economist Josh Williamson said.
"The higher than expected CPI implies that the RBA likely won't pause the hiking cycle in the near-term, and we see upside risks to our terminal rate of 3.35% next year."
ANZ agrees with Citi.
"These broad-based, domestically driven inflationary pressures are persistent and harder for the RBA to rein in, particularly given that the overall economy is in good health with solid household spending, strong business conditions and as substantial volume of unfilled labour demand," ANZ economists Catherine Birch and David Plank said.
"We see higher inflation extending into 2023 due to both the stronger Q3 data and the upside risks ahead, given continuing cost pass-through, flooding, a lower Australian dollar and evidence of persistence in inflationary pressures globally."
The most significant price rises were new dwelling purchases by owner-occupiers up 3.7%, gas and other household fuels up 10.9% and furniture up 6.6%.
More on CPI
Here’s what CreditorWatch chief economist Anneke Thompson had to say about the CPI figures
“September quarter Consumer Price Index (CPI) data shows that inflation continues to roar along, with prices growing by 7.3% over the year to September 2022.
"Costs of constructing a new dwelling continue to be a key driver of inflation, with pricing increasing by a massive 20.7% year on year, and by 3.7% over the September quarter.
“Price rises in constructing a new dwelling will have broad implications for the Australian economy, as new dwelling construction is such a large employer and contributor to our economy.
"Already, housing construction starts have started to slow, with new dwelling commencements down 28.9% in the June quarter 2022 compared to a year prior.
"The implications are that residential vacancy rates are going to stay tight for some time, as less new housing stock is added to the market over the later half of 2023 and into 2024.
"This flows on to continuing rising rents, another key inflation driver. Rents increased by 2.8% across Australia over the year to September 2022, the highest rise since March 2014.
“For capital cities excluding Sydney and Melbourne, rents increased an extraordinary 5.6% over the year to September.
"In the Federal Government’s 2022-23 budget released yesterday, the Treasurer announced a $10 billion investment in to social and affordable housing, with the aim to build 30,000 dwellings over the next five years. These dwellings are sorely needed, but the program will likely keep the construction industry busy for some time, with continued pressure on costs.
“Overall, it is non-discretionary inflation that will be the biggest headache for Australians, as these are goods people can’t do without, and inflation in this sector is rising much faster than inflation for discretionary goods, at 8.4% versus 5.5% year-on-year.
"Interest rate rises tend to hit the price of discretionary items first, as this is where consumers can change their spending habits. Unfortunately, interest rate rises have a smaller impact on the big problem area of non-discretionary inflation, meaning the RBA has a tough job on its hands as it fights inflation.
“At CreditorWatch, we see the implications of strong price rises, particularly in the construction sector, through increases in B2B trade defaults and also increases in the probability of default across the country.
"While B2B trade defaults were down on a monthly basis in September 2022, the trend shows increasing default activity, meaning more businesses are taking action against non-payment of invoices.
"The first sign of distress in the economy is cash flow problems for small businesses and unfortunately our data is pointing to a slowly increasing issue here.”
A hard landing coming
Treasurer Jim Chalmers fronted the National Press Club today post-budget hand down, saying that although we may avoid recession, it could be a hard landing.
"It's already well understood that Australia enjoyed nearly three decades of uninterrupted economic growth until that ended in 2020, but it should also be understood that low and stable inflation was a cornerstone of that remarkable run," the Treasurer said.
"And now, we are in genuinely different and genuinely difficult times. A period of multiplying economic uncertainties — war in Europe, inflation in the US, a slowdown in China with significant breaking forces operating on our economy internationally and domestically in the form of tighter monetary policy.
"That has implications. The substantial hit to growth, the potential for a hard landing, the possibility of a global recession."
He also defended his decision to keep the budget safe.
"An indiscriminate splash of cash would have made our inflation challenge more profound and more prolonged, and ultimately more painful for people who would have felt it through higher prices and higher interest rates.
"At a time of rapidly rising interest rates, we weren't prepared to do something that might have made a nice splash on budget day, but would ultimately be counter-productive to tackling the inflation challenge."
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