Australian CPI data was out last week with headline inflation rising 0.4% over the quarter (consensus: 0.5%) disappointing market expectations. Housing (up 0.7%) and Transport (up 1.1%) rose, driven by rising gas and fuel costs respectively. This however was offset by declines in recreation and culture (down 0.7%) and household furnishings (down 0.4%) driven by cheaper international travel costs and retail competition in the furniture space respectively. Underlying inflation, the average of the Reserve Bank of Australia’s (RBA) two preferred measures, did tick up slightly to sit at 1.95% year-on-year but still sits just below the bottom of the RBA target band. Attention will be on next month’s release of wage inflation statistics to see if any signs of a recovery in the hard data emerge to match the RBA comments in recent Board minutes of a tightening labour market with employers struggling to easily fill vacancies.

The European Central Bank (ECB) kept interest rates and its bond-buying program unchanged while maintaining its guidance to move gradually, in withdrawing from its stimulus program. This means the ECB will continue buying 30bn euros of assets a month until September at least with an end of this program linked to higher levels of inflation over a prolonged period. The focus was instead on the weakening momentum of the European economy with slower growth in leading indicators highlighting lower business confidence.

Global equity markets had a mixed performance with Japanese, UK and Australian share markets rising while the US market was broadly flat for the week. In the US, rising bond yields prompted talk of asset price re-evaluation i.e. more attractive returns on risk-free assets means people demand a lower price than before to continue holding stocks. This was mostly offset by positive earnings surprises from the likes of Amazon and Microsoft. In Australia, the mining sector was a notable weakness on the back of weaker commodity prices while the negative news flow from the Royal Commission hearings and a broker downgrade of Westpac prevented financial equities from sharing in the broader market rally.

Nickel and aluminium ended the week lower on news that the Trump Administration would delay the implementation of sanctions and potentially not extend them to the nickel production related to Russian corporation Rusal. Precious metals retreated on the back of rising bond yields as lower-risk Treasuries became more competitive as safe haven assets. We saw the US Dollar appreciate against major currencies off the attractiveness of rising bond yields and the widening differential to Europe and Japan for example where the ECB left its policy setting the same and Japan is expected to announce likewise. The Australian dollar was flat to negative against our major trading partners following the disappointing CPI result which further delayed expectations of an interest rate hike.

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