Macro-Micro: inflation mystique & Bank set up

The macro data this week is basically all international – CPI being the key to everything there and will produce inferred and trade implications. There is a clear mystique to the inflation spiral the globe finds itself in.

On the micro front – Bank: Buy the rumour, Sell the fact set up is playing out faster than expected.

Macro stuff: Inflation, (dis)inflation or deflation?

Europe and the US enter the CPI story this week both releasing inflation type byTuesday night –

Let’s start with Europe:

  1. Draghi last Wednesday would suggest inflation in the Eurozone remains elusive and the periphery remains below key mandates – I say fact, and that is likely to be confirmed Tuesday night.
  2. Expectation is for the Eurozone inflation to be a at 1.3% – this is almost championed as optimal, in my view this is anaemic by any other measure. Look to Italy and Spain for possible pressure points
  3. ECB will support the zone for the foreseeable future as seen from this comment around interest rates remaining ‘well past the horizon of the net purchases’ (net purchases relates to the ECB’s QE program) conclusion: the ECB has little confidence inflation will blow out with the record low rates in fact it suggest it see limited to no inflation in the coming year.

The US:

  1. Remember the second mandate of the Fed? – ‘Core inflation to be maintained around 2%’ Core inflation has fallen from 2.3% at the start of the year to 1.7% now.
  2. The data of note this week is core personal consumption expenditure – both the YoY and MoM figures are expected to snap out of this decline so a positive – however inflation is clearly lumpy even in the US and several sub sectors are seeing disinflation or even deflation making this all quite messy. Watch motor vehicle, medical, cell phone plans and physician service all have been going backwards.

I would highlight that in the US it’s not inflation metrics that are going to create market moments in the interim its Washington.

Some time with in the next 10 days the new Fed Chair will be announced. Of the five candidates Jerome Powell is now firm favourite with John Taylor and Janet Yellen distant equal second choice –

To get the best gauge have a look at this site: gives best insights in my opinion.

Micro Stuff:

Lot of questions around the ASX hitting 6000 points before Christmas – every chance considering its within 70 points – the better question is can it hold above this level on a medium term view?

That brings me to the banks – solid results are just not enough.

  1. ANZ delivered a very inline number with consensus – cash earnings and EPS very solid – asset values remain robust, growth is in the bottom line is being maintained.
  2. CET is clearly moving in the right direction and ROE remains at levels that attract institutional monies – also a tick
  3. However margin squeeze is materialising – NIM below 2% is a concern – particularly considering the switch from IO to P&I hasn’t really taken off yet which is a headwind.
  4. Growth came from positive jaws (income over stripping costs) rather than organic growth
  5. Clearly slimming down as FY18 looks clouded as the housing-led recovery slows – loan growth is a big question mark.

The inferred flow through to NAB, WBC and CBA is clear – where’s the next leg of growth? Looks to be cost out – which is logical. However will this cause the ASX to hold above 6000 over the coming 6 months? In my own view – unlikely as the banks will most likely tread water.

NAB reports Thursday – if like ANZ, the buy the rumour sell the factor scenario plays here – this should be seen as a confirmation – NAB is likely to be the cleanest of the four reports.


Evan Lucas is an expert guest contributor to Fairmont Equities.

Evan is founder of The Lucas Review. Prior to that he was Market Strategist at IG. He is well known as an expert commentator in finance media such as Sky News Business, ABC1, the Australian Financial Review, CNBC, and Reuters.

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