3 things we learned this week

It was a busy week for central bankers, with a speech by US Federal Reserve chair Jerome Powell moving markets, while RBA governor Philip Lowe issued an apology over interest rates.

Here’s three things we learned this week:

1. Early signs that inflation pressures may be easing

After months of rapid rate hikes, the RBA’s attempts to cool inflation may finally be taking hold.

The latest monthly consumer price index (CPI) showed a surprise slowdown in annual inflation, ABS data revealed on Wednesday, falling to 6.9% in October from 7.3% in September.

Australian shares rallied on the result, although analysts say it’s too soon to know if inflation has peaked.

Peter Warnes, head of equity research at Morningstar said care should be taken with the monthly CPI.

“The annual re-weighting of CPI components reduced the headline [inflation] from 7.1% to 6.9%,” Mr Warnes said.

“The October data only reflects up to date price information on 62% of the basket,” he added.

“November data will provide a much clearer picture and consequently the RBA should not take too much notice of the downside surprise, welcome as it is.”

October Retail turnover also came in softer than expected, separate ABS data showed on Monday, although shoppers may have been holding out for the Black Friday and Cyber Monday sales in November.

“Whether sales were postponed waiting for hyped Black Friday/Cyber Monday is moot, as sales over 25 –28 November were strong, cycling record levels in 2021,” Mr Warnes said.

According to merchant transaction data from NAB, Australians spent an estimated $7.1 billion across the four-day shopping event this year.

But the softer inflation data isn’t expected to stop the RBA from raising the cash rate when it meets next week with economists predicting a 25 basis point increase to 3.1%.

The size and speed of rate increases have caught many by surprise, given RBA commentary during the pandemic said rates were expected to remain on hold until “2024 at the earliest”.

On Monday, RBA governor Philip Lowe issued an apology to those who acted on that guidance, and now regretted it.

“I'm sorry that people listened to what we've said and acted on that, and now find themselves in a position they don't want to don't want to be in," Dr Lowe said during a senate committee on Monday.

2. Property prices continue to fall, but at a slower pace

National dwelling prices fell for a seventh straight month in November, although the rate of price falls slowed.

Corelogic data released Thursday showed home prices fell 1% during the month, to be down 7% since the April peak.

Tim Lawless, research director at Corelogic said it’s the smallest monthly decline since June.

“Three months ago, Sydney housing values were falling at the monthly rate of 2.3%. That has now reduced by a full percentage point to a decline of 1.3% in November,” Mr Lawless explained.

“In July, Melbourne home values were down 1.5% over the month, with the monthly decline almost halving last month to 0.8%.”

Most of the broad rest-of-state markets have also seen the pace of declines decelerate, he noted.

“Potentially we are seeing the initial uncertainty around buying in a higher interest rate environment wearing off,” he said.

“There is still the possibility that the pace of declines could reaccelerate, especially if the current rate hiking cycle persists longer than expected.”

Updated forecasts by economists at ANZ see prices falling 18%, peak to trough, by the end of 2023.

“The biggest factor driving down prices is reduced borrowing capacity not a rise in forced sales,” ANZ senior economist Felicity Emmett said on Tuesday.

“In 2024, as policy stabilizes and then eases late in the year, we expect to see a modest recovery begin to emerge in house prices and look for gains of around 5% by end-2024.”

3. China ‘reopening’ sparks commodities rally

Despite a weaker session on Friday, it was a strong week for Australian miners with the materials sector gaining 4.14% over the week.

The gains were in part driven by comments from Fed chair Jerome Powell, who said the pace of interest rate hikes could slow as soon as this month.

But as Morningstar assistant editor James Gruber notes in an editorial, an easing of Covid lockdown restrictions in China is arguably just as significant for markets.

Protests across China called for an end to strict Covid-zero measures, with the giant Chinese cities of Guangzhou and Chongqing announcing a relaxing of some measures.

“An easing of Covid lockdown restrictions in China could have a significant bearing on the fates of commodities, inflation and interest rates over the next 12 months,” Morningstar’s James Gruber said.

How shares ended the week: 

The S&P/ASX200 closed 0.72% lower on Friday to 7,301.50, but gained 0.58% over the week.

What to watch next week:

• Tuesday: RBA monetary policy meeting
• Tuesday: Total value of residential property in Australia (Q3)
• Wednesday: GDP (Q3)
• Thursday: Trade balance (October)

Central banks will again be in focus next week with the RBA to announce its final monetary policy decision for 2022. The cash rate is widely expected to rise by 25 basis points to 3.1% when the board meets on Tuesday.

On Wednesday, the Australian Bureau of Statistics will release GDP figures for the September quarter, with household consumption expected to remain strong.

Trade balance data will be released Thursday, with stronger commodity prices expected to drive Australia’s trade surplus higher.