Outlook for the economy is more positive

• Australian consumer inflation is 5.1% and below the 5.6% consensus
• In January, unemployment rose marginally to 3.7%
• Australian stocks in the consumer discretionary sector are benefitting from the US positive retail sales outlook.

A week in the data

The week just gone was a busy one in economic data points. They provided an insight into where the market was positioning itself regarding the economic outlook and what adjustments might be required as the path ahead became clearer.

Australian February consumer inflation expectation is 5.1% and below the consensus of 5.6%.

January employment change recorded a loss of 11.5k jobs versus the expected addition of 20k, sending unemployment marginally higher to 3.7%. Unemployment has hovered at 3.5% since mid-2022 and now looks to be trending higher.

US retail sales were solid, 3% change in January versus an expectation of 1.8% growth over the month.

The positive surprise in the US retail sales data was best reflected in the repricing of stocks benefiting the most from a positive outlook in consumer spending, particularly consumer discretionary.

The S&P/ASX 200 Consumer Discretionary ASX:XDJ (XDJ) leapt 2.7% on the 16th February while the broader S&P/ASX 200 ASX:XJO (XJO) was up 0.8%.

Confounding expectations

With consumer pocketbooks remaining open, unemployment only slowly retracing to its historical mean, and policymakers cautiously moving to a more dovish stance, one might expect energy prices and, particularly, oil markets to head higher.

Confounding expectations, the international crude benchmark Brent was lower by 4% last week.

The main driver of lower prices is surging US production and inventories. For the week ending the 10th of February, the total US inventories rose by a remarkable 19.3m barrels.

Surging US production and markedly lower gasoline and diesel demand has stocks climbing in the onshore US. Despite an over 2m/barrels per day increase in exports, the US is still filling tanks.

Low inventories for ultra-low sulphur diesel continues to complicate the picture on both sides of the Atlantic. Robust refinery margins incentivise high operational capacity and will draw on existing crude oil production.

The extended pipeline of producer sales is taking advantage of the present high refiner margins while outright demand is dwindling because of the following factors: fleet upgrades to hybrid engines, the electric vehicle production explosion, and the embedding of remote working are telegraphing softer outright oil prices for the northern hemisphere’s summer.

An outlook that involves lower gasoline and diesel prices will be welcomed by policymakers grappling with a switch to a more dovish approach to interest rates.

The week ahead in data

The market will have little time to digest last week’s action as the data comes thick and fast this week.

On Monday, the APAC markets welcomed China’s PboC interest rate decision to maintain the current internal interest rate. The Aussie dollar rose by 0.38%, narrowing on the 70 US cents handle.

Sensitive economic data to be released later in the week:

• Reserve Bank of Australia (RBA) meeting minutes
• Key European and UK Purchasing Manager Index (PMI)
• US PMI data

On Wednesday:

• NZ monetary policy statement
• Federal Open Market Committee (FOMC) minutes

Rounding out the week, on Thursday, the US GDP and initial jobless claims will be published.

Wrap up

Softer energy markets, inflation rounding a corner, and looser labour markets, all point to international monetary policymakers taking their hands off the interest rate levers in the coming weeks and months.

Global stock markets will welcome these developments provided the labour markets remain healthy and the deceleration applied by central banks is not so significant that it will hinder planned projects and productivity.