Australia lags Asia after a CPI jump

Asia is mostly firmer, with the exception of Australia which is struggling on the back of a much stronger than expected CPI print and a poor performance by the iron ore plays despite a good report from BHP Billiton.

The Australian currency has been the highlight of Asian trade so far today as it surged against the greenback on a much better than expected CPI reading. Australia’s Q4 CPI report showed a 0.8% rise on quarter, also much better than the 0.4% rise the market was looking for.

On-year, CPI came in at 2.7% while the trimmed mean reading was at 0.9%. This was the largest rise in the trimmed mean since Q2 2011 and the annual reading of 2.6% now lies in the top half of the RBA’s target band. This hasn’t happened in a few years and will likely result in some revisions by the RBA at the February meeting. The market was certainly positioned for a benign CPI print and therefore there was a swift unwinding of AUD shorts as the data hit the wires.

Of course the question now is how this impacts the RBA’s opinion on rates. While I don’t feel this changes much as far as rates are concerned, it certainly goes a long way towards calming disinflation fears. Judging by the price action in the ASX 200 which has dropped today, it seems the market is pricing in a reduced rate cut probability.

BHP results fail to inspire

Mining giant BHP Billiton’s second quarter output report has also been a highlight today. Overall, the report was good but not great and wasn’t enough to see the stock bid higher locally in an environment where iron ore prices continue to be beaten lower.

Three commodities had record prints in copper, alumina and metallurgic coal, with iron near enough to equalling its record production number from Q1. Iron ore came in just short of an all-time record at 48.8Mt which was just short of consensus estimates of 49.9Mt. That is a 16% increase quarter-on-quarter taking the half year production figures to 97.82mt – a 19% jump half-on-half. The company is also cheering the fact that capital and exploration CAPEX for FY14 is at US$16.1 billion and is well on track to hit expectations and has the possibility to come in under the forecasted figure if it continues its divestment program.

BHP has seen a 10% increase in portfolios production which is expected to hit 16% over the next two years. This on face value is a very typical BHP report – steady, reliable and well managed. The report shows that BHP continues to evolve its diversified portfolio to offset external factors. The copper and met coal reads are pleasing, and with iron ore coming in at just shy of a record, and considering iron ore makes up 51% of EBIT, the report reads solidly. However the petroleum print is disappointing and will most likely be viewed as so, and considering it makes up 42% of EBIT may weigh on investors’ minds heading into its first half numbers.

UK data in focus

Looking ahead to the European session, the major bourses are in for a firmer start as they ride the momentum from Asian trade. There isn’t as much conviction in the FTSE though which is only pointing mildly higher ahead of a raft of data today. At 20.30 AEDT we get claimant count change, MPC asset purchase facility votes, unemployment rate, average earnings and public sector borrowing data. Any indications of further strength in the UK economy could see the pound continue its run and cable could trade back to 1.65.

The unemployment rate will be particularly interesting as it is expected to drop to 7.3% (from 7.4%). Given the BoE has already said its trigger for rates is 7%, a beat could result in a GBP rally. Perhaps if the unemployment rate is much stronger, there could be a shift in language to reflect the BoE’s commitment to easy policy. In that case then the pound might finally give up some ground. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.