Craig James – Chief Economist – CommSec

Inflation takes centre stage
·         In Australia inflation data will dominate the calendar in the coming week – of particular importance in light of the upcoming Reserve Bank Board meeting. A super-low inflation result could be the trigger for another rate cut. In the US the data focus will be on the home prices and economic growth. But for investors and traders the focus will be on the Federal Reserve policy meeting on Tuesday and Wednesday.
·         In Australia the week kicks off on Monday with CommSec releasing the quarterly State of the States economic performance index.
·         On Tuesday, Roy Morgan and ANZ release the weekly consumer sentiment reading. Confidence levels have fallen for the past four weeks, down by 3.3 per cent, but most likely affected by election result uncertainty.
·         On Wednesday inflation data will be in focus, when the Consumer Price Index for the June quarter is released. The “official” inflation data only comes around once a quarter in Australia. There is a private sector monthly survey on inflation from the Melbourne Institute but the Australian Bureau of Statistics (ABS) only publishes its inflation measures once a quarter.
·         The monthly inflation gauge suggests inflation should remain relatively tame over the quarter. The CBA Group is tipping a modest result. A lift in prices of 0.5 per cent is expected over the quarter with annual inflation expected to ease from 1.3 per cent to 1.1 per cent.
·         Over the quarter, the price of petrol rose by around 4 per cent, lifting the headline result. But more importantly, investors will focus on the “underlying” measures that exclude petrol as well as the non-tradable price measures that focus on domestic price pressures.
·         We expect that underlying inflation grew 0.4 per cent in the June quarter and around 1.4 per cent over the year. Such a mild result will shorten the chances on an August rate cut.
·         On Thursday the Australian Bureau of Statistics (ABS) will issue data on export and import prices for the June quarter.
·         And on Friday, the ABS releases the producer price indexes – key measures of business inflation. It will be important to see what impact the volatile Aussie dollar has had on prices of imported goods across the docks.
·         Also on Friday the Reserve Bank releases the “Financial Aggregates” report for June, which includes money supply measures and private sector credit (loans outstanding). We expect that credit rose by around 0.5 per cent in June to be up just over 6.5 per cent over the year.
US Federal Reserve to decide rate settings
·         While the focus is primarily on inflation in Australia, a broader array of events are scheduled in the US. Not only does the Federal Reserve policymaking committee meet but influential economic data will be issued.
·         Over Tuesday and Wednesday, the Federal Reserve Open Market Committee meets to decide monetary policy settings (result 4am Sydney time on Thursday). The guessing game on when the Fed will next lift rates probably won’t be resolved. However the text of the decision will be important in determining whether the Fed is on course to lift rates later this year or whether it is likely to be delayed again.
·         Also on Tuesday data on consumer confidence is released together with the CaseShiller measure of home prices, influential Richmond Federal Reserve index and new home sales. The Markit organisation also releases a “flash” (or early-warning) gauge for the services sector. Annual growth of home prices may have held around 5.8 per cent while consumer confidence may have eased modestly. A further expansion in the services sector is expected. In terms of new home sales, housing activity has remained healthy and new home sales are expected to have lifted by 1.3 per cent after a 6 per cent slide in June.
·         On Wednesday, pending home sales data is issued alongside the weekly data on mortgage applications and durable goods. The preliminary data on durable goods orders will be closely watched as it provides some colour on the level of business investment. Orders are expected to have fallen by 1.3 per cent in June after the 2.3 per cent slide in the prior month.
·         The usual weekly data on claims for unemployment insurance is also issued on Thursday together with the advance goods trade data and Kansas City Fed index.
·         On Friday, the first reading or “advance” measure of economic growth in the June quarter will be issued in the US. Economists expect that gross domestic product (GDP) grew at a healthy 2.5 per cent annualised rate in the June quarter, up from the weather-affected 1.1 per cent growth in the March quarter. The lift in activity is driven by the strength in consumer spending in the quarter. Data on employment costs, consumer sentiment and the Chicago purchasing managers index are also released on Friday.
Sharemarket, interest rates, currencies & commodities
·         The US earnings season shifts up another gear in the coming week. And while hopes aren’t high for a good season of profit results, as we highlighted last week the contrarian view may prove more rewarding. So far financial companies have surprised with rather upbeat earnings, but it is only early days and the majority of weakness is expected to be in the energy sector.
·         On Monday, 83 stocks are expected to report including CoreLogic, Rockwell Collins and Kimberly Clark. On Tuesday there are another 223 companies listed including Apple, Caterpillar, Chubb, and Under Armour. On Wednesday earnings results are expected from 270 companies including Boeing, Bayer, Deutsche Bank, Facebook and GlaxoSmithKline. On Thursday 371 companies should issue profit results including ConocoPhillips, Expedia, and Ford Motors. And on Friday there are 96 companies listed including Chevron, Exxon Mobil and Xerox.

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