Market Mover - BNP PARIBAS - Investment Services India

Australia: Not Yet• Having been forecasting no change in ratesthrough to end-2012, the consensus has swungto expect a 25bp rate cut on 1 November.6.0Chart 1: Inflation ContainedUnderlying Inflation• Better inflation data mean the RBA now hasthe capacity to ease policy. However, recentofficial commentary suggests November is toosoon to expect a move.• Our forecast is for a 25bp cut in Decemberas insurance against downside news betweenthen and the next RBA meeting in February.5.04.03.0% q/q annualised% y/y2.01.0• Contrary to the market’s perception, wejudge the greater risk is for easing to be delayeduntil 2012.Underlying Inflation = average of trimmed mean and weighted median0.0Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q110 Q111Source: ABS, BNP ParibasChart 2: Ex-Food and Energy Inflation EasingShift in consensusThere are two key and related events in Australiaover the coming week, the RBA policy meeting on1 November and the release of the Statement onMonetary Policy on 4 November. At the time ofwriting, the market was pricing in almost a 25bp cutat the upcoming meeting. The consensus amongeconomists has also swung in favour of a 25bp ratecut, although only by a slim margin (12 for a cutversus eight for no change). Our forecast remains fora rate cut at the December meeting.While the market has long been pricing in aggressiverate cuts, which are unlikely to be delivered on thescale expected, the change in the economists’consensus is marked. Last week the median forecastwas for an unchanged cash rate throughout theremainder of 2011 and all of 2012. Now the majorityof economists expect one imminently, which raisesthe question: what has changed?76543210-1% y/y-2Q191 Q194 Q197 Q100 Q103 Q106 Q109Source: ABS, BNP ParibasCPI ex-food & energyHeadline CPIIt’s inflation, stupidThe obvious potential game changer was the Q3inflation release. Headline CPI inflation was in linewith market expectations at 3.5% y/y, down from3.6% in Q2. However, the measures of underlyinginflation – the trimmed mean and weighted median –both surprised significantly to the downside, eachrising by 0.3% q/q against expectations for a 0.6%increase. On a y/y basis, trimmed mean inflationeased to 2.3% from 2.6% and weighted medianinflation fell to 2.6% from 2.9%. The ABS alsointroduced a new CPI ex-food and energy figure (ameasure of underlying or core inflation commonlyused in other countries). It, too, eased on a year-onyearbasis to 2.1% from 2.5% and is at its lowestsince Q4 2009.The sharp reduction in quarter-on-quarter underlyinginflation (as measured by the average of the trimmedmean and weighted median) to 0.3% q/q from 0.6%q/q is important. On an annualised basis, the figure isonly 1.2%, well below the bottom end of the RBA’starget range and the weakest since Q4 1998. Ittherefore unwinds some of the 3.2% annualisedaverage quarter-on-quarter increase seen in H1 2011,which itself has been revised down from 3.5% q/qannualised.Overall, on a year-on-year basis, two out of threemeasures of underlying inflation (the trimmed meanand ex-food and energy) are running in the lower halfof the 2-3% target range while the other (theweighted median) is running at only 2.6%.Dominic Bryant 27 October 2011Market Mover25www.GlobalMarkets.bnpparibas.com