Inflation: Alert but not alarmed
Purchasing manager survey; Skilled vacancies; International trade
What happened? Price pressures eased slightly in the latest surveys of purchasing managers.
Implications: Investors must remain alert to inflation indicators. Clearly the outlook for inflation and interest rates and Covid-19 are the dominating concerns on global sharemarkets.
Other data of note: Skilled job vacancies hit a 12½-year high in May. The goods trade surplus hit a record high of $13.3 billion in May with exports up 13.7 per cent in the month.
Surveys of purchasing managers are conducted regularly to get up-to-the-minute readings on the economy.
What does it mean?
• In the latest surveys of purchasing managers, input costs (such as raw materials) increased at a slower rate in June than in May. That news is encouraging – but just like developments with the Covid-19 virus – you can’t get too comfortable, especially with the amount of economic stimulus being applied.
• The Reserve Bank Board recently reiterated that it doesn’t believe the pre-conditions for a hike in the cash rate will be met until 2024. Commonwealth Bank Group (CBA) economists think that the pre-conditions may be met earlier and now expect the first rate hike to be delivered in November 2022.
• The Reserve Bank Board meets on July 6 and may provide fresh guidance on interest rate settings. At the meeting, the Board will decide which bond maturity it will focus on with a view to maintaining the 3-year bond target at 10 basis points. The choice is between the April 2024 or November 2024 maturity.
• Clearly November 2022 is still a long way off. But given the success that Australia has had in recovering from the Covid-19 recession, forecasters are now re-assessing what lies ahead. For investors, interest rates will still stay at record lows for some time, and fiscal policy will remain stimulatory, underpinning solid business conditions.
• Other data out today confirms the strength of Australia’s economic recovery with exports soaring, the trade surplus hitting record highs and skilled job vacancies lifting to 12½-year highs.
• The continued strength in the job market creates the potential for higher wages and underscores our belief that the Reserve Bank could lift rates earlier than it currently expects.
What do you need to know?
“Flash” IHS-Markit survey of purchasing managers
• The IHS Markit Manufacturing Purchasing Managers’ index (PMI) eased from a record 60.4 points in May to 58.4 points in June. The services PMI eased from 58.0 points in May to 56.0 points in June. Readings above 50 points indicate an expansion in activity.
• Inflation concerns: According to the manufacturing survey, IHS-Markit reported that “Lead times continued to worsen in June, and price pressures remained elevated. That said, both input costs and output prices increased at slower rates than in May.”
• And according to the services survey, IHS-Markit reported: “On prices, the rate of selling price inflation accelerated fractionally to a fresh series record. This contrasted with a slightly slower rise in input costs.”
Skilled vacancies – May
• The National Skills Commission reported that skilled internet vacancies rose for the 13th straight month, up by 1.9 per cent (or 4,500 job advertisements) in May to a 12½-year high of 245,400 available positions. Vacancies are 163.9 per cent higher than a year ago and 46 per cent above pre-Covid-19 levels.
• Skilled vacancies by state/territory in May: NSW (up 0.3 per cent); Victoria (up 0.7 per cent); Queensland (up 6.4 per cent); South Australia (up 4.5 per cent); Western Australia (up 4.4 per cent); Tasmania (down 1 per cent); Northern Territory (up 3.1 per cent); ACT (up 1.1 per cent).
• Job advertisements increased in seven of the eight broad occupational groups in May and in 35 of the 48 detailed occupational groups.
Preliminary international trade – May
• According to the Australian Bureau of Statistics (ABS), in original terms, the value of exports of goods was up 10.7 per cent in May to a record high of $39.2 billion. The value of imports rose by 0.6 per cent to $25.9 billion. The trade surplus hit a record high of $13.3 billion in May.
• Rural exports rose by 12 per cent in the month to be up 36 per cent on the year. And non-rural exports rose by 11 per cent to be up 35 per cent on the year.
• Within imports, the ABS noted: “Road vehicles declined from a record high in April, with declines observed across several vehicle categories. The semi-conductor shortage has severely impacted new vehicle production globally, hampering the ability for Australian dealers to meet strong domestic demand.”
• Also of note on imports: “The increase in electrical machinery, to its third highest value on record, was driven by lithium-ion electric accumulators (batteries) and assembled solar arrays and solar cells. For the first month on record lithium-ion battery imports reached $100m.”
Published by Craig James, Chief Economist, CommSec