Australian dollar shrugs as PPI falls

The Australian dollar is almost unchanged on Friday, trading at 0.7112.

Australia’s PPI slips

Just a day after Australian CPI unexpectedly rose, the Producer Price Index went in the opposite direction. PPI in the fourth quarter slowed to 5.8% y/y, down from 6.4% in Q3 and below the consensus of 6.3%. On a monthly basis, PPI fell to 0.7%, much weaker than the gain of 1.9% in Q3 and the forecast of 1.9%.

The RBA has raised rates sharply but inflation is yet to peak. The CPI release for Q4 was a shocker, rising to 8.4% after a 7.3% gain in Q3. The markets had priced in a peak rate of 3.6%, but with the cash rate currently at 3.1% and more rate hikes on the way, it appears that the market is underestimating the terminal rate.

The Australian dollar has been on a tear, rising around 10% since Nov. 1. The outlook for the Aussie remains bright, both for domestic and global reasons. At home, the RBA will continue to raise rates in order to curb inflation. Abroad, China has reopened and that will increase demand for Australian exports. As well, commodity prices are high which is good news for the export sector and the Australian dollar.

Will the US be able to avoid a recession? The answer isn’t clear, as the economic data shows a mixed picture. The employment market remains robust and overall growth has been positive, with GDP for Q4 coming in at 2.9%. Manufacturing and Services PMIs continue to show that these sectors are contracting and housing has been especially weak, as it lowered Q4 GDP by about 1.3%.

Consumer spending, which accounts for some 68% of GDP, could determine whether the US economy tips into a recession or not. Consumer spending rose 2.1% in Q4, down slightly from 2.3% in the third quarter. However, the December release is worrying, as consumer spending declined by 1.1%. If the Fed is to guide the economy to a soft landing, retail sales will have to rebound strongly.