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Savanth Sebastian – Economist – CommSec

All about inflation

• In the coming week inflation dominates the Australian economic calendar. In the United States a raft of indicators is released including those covering economic growth, consumer confidence and home sales.

• On Monday, the Australian Bureau of Statistics (ABS) releases figures on lending finance. The lending finance data shows the value of new loans taken out across housing, personal, lease and business loan categories. In October, new loans totalled $68.68 billion in October, down 5.8 per cent over the year.

• Also on Monday, CommSec will release the quarterly State of the States report – an assessment of the economic performance of state and territory economies.

• On Tuesday, there is just one indicator of note: the weekly series of consumer sentiment. Consumer confidence is holding just shy of four-month highs. But investors will also be interested in the reading on inflation expectations 2 years ahead, which is currently holding at a 13-month high.

• On Wednesday, the main measure of inflation in Australia – the Consumer Price Index (CPI) – is scheduled for release. And the indications are that another low reading of inflation is on the cards.

• We are tipping a 0.7 per cent lift in the headline rate of inflation, lifting the annual inflation rate to near 1.6 per cent.

• One factor that is an outlier and may actually boost overall price growth is the rising cost of petrol. Pump prices probably rose by 5.5 per cent in the December quarter, adding around 0.2 percentage points to the quarterly CPI.

• During the quarter there are generally seasonal price increases in tobacco and the cost of domestic holidays and accommodation. Offsetting these price changes, lower prices are likely for pharmaceutical goods. Higher prices are likely for dwelling purchase while rents may have been flat or lower in the quarter.

• The Reserve Bank attempts to keep inflation between 2-3 per cent over time. But when prices of goods like petrol are rising, the Bank tends to focus more on measures of “underlying” prices. We suspect that underlying price measures probably grew around 0.5 per cent in the quarter will annual growth around 1.6 per cent.

• Should prices move in line with forecasts – that is, inflation stays low – the Reserve Bank will maintain its neutral policy stance when it comes to interest rates. It is pretty clear that inflation has bottomed out and will be closely watched over 2017.

• On Friday the (ABS) will release more data on prices, this time figures on import and export prices and the Producer Price Indexes (PPI). These international price measures tend to be dominated by changes in the Australian dollar and iron ore, coal and oil prices while the PPI focuses on business inflation.

Overseas: Raft of US indicators including GDP

•  There are no key indicators to watch in China in the coming week so the US hogs the limelight. Economic growth data and home prices are the highlights.

•  The week kicks off on Tuesday with the release of the influential Richmond Federal Reserve index, existing home sales and the flash Markit Manufacturing PMI. Existing home sales may have eased by around 1.5 per cent in December, while the manufacturing PMI should continue to show a healthy expansion with a reading around 54.0 in January.

•  On Wednesday, a key measure of home prices is released with the usual weekly data on mortgage applications. The Federal Housing Finance Agency index on home prices is likely to hold at around 5.5 per cent annual growth.

•  On Thursday, four key data releases are scheduled to take place. Of key focus will be the new home sales release alongside the leading index for December. In addition wholesale inventories, the Chicago Fed national activity index and the weekly data on claims for unemployment (jobless claims) are released.

•  On Friday data on durable goods orders (a measure of business investment) is released together with the “flash” or advance measure of economic growth (GDP) in the US. Economists expect that the economy slowed to a 2.3 per cent annual pace in the December quarter, down from 3.5 per cent in the September quarter.

•  Also released on Friday quarterly data is released on personal consumption and consumer sentiment.

Sharemarkets, interest rates, exchange rates and commodities

•  The US earnings season moves into third gear in the coming week. On Monday, earnings are expected from 38 companies including McDonalds and Resmed.

•  On Tuesday, around 77 companies are to report including Johnson & Johnson, Alibaba Group, Procter & Gamble, Verizon, Alcoa and DR Horton.

•  On Wednesday, profit results are listed for 122 companies including AT&T, Boeing, Ebay, Fiat Chrysler and Novartis.

•  On Thursday, more than 190 companies are slated to release earnings including, Google, Amazon, Microsoft, Intel, Starbucks, Caterpillar, Unilever, PayPal, and Ford.

•  Closing out the week on Friday, just 28 companies are scheduled to report, including, Chevron, Colgate Palmolive and Honeywell

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