PPI
Will Business Confidence shake up sleepy AUD?The Australian dollar has started the week with a whimper. Currently, AUD/USD is currently trading at 0.7620.
Australia releases the NAB Business Confidence early on Tuesday (1:30 GMT). Business confidence continues to show stronger optimism, rising to 16 in February, up from 10 beforehand. The Australian economy has recovered remarkably well from the Covid-19 downturn - unemployment has dropped below 6% and commodity prices are rising as the global economy finds its footing.
A major sore point in the country's vaccine rollout. Australia had banked on the AstraZeneca vaccine for most of 26 million residents and had planned to vaccinate almost all by the end of 2021. However, with recommendations that people under 50 should not receive the AstraZeneca shot, the government has had to abandon this goal and is scrambling to find millions of Pfizer shots.
For years, US inflation has been low and off the radar of investors. With plenty of pent-up demand due to the Covid crisis, inflation has moved higher and has become a central focus for the market over the past several months. On Friday, the US released the March Producer Price Index, which measures inflation at a wholesale level. Both the headline and core readings accelerated in March and beat the forecast. Headline inflation rose 1% MoM and 4.2% YoY - the latter to its highest level since September 2011. Core PPI, which excludes food and energy prices, climbed 0.7% MoM and 3.1% YoY. The annual rate matched a high last seen in February 2011.
With PPI numbers higher than expected, the markets are keeping a close eye on consumer inflation data (Tuesday, 12:30 GMT). If CPI beats the forecast, that could force the Federal Reserve to re-evaluate its pledge not to raise rates prior to 2024. The Fed isn't even discussing tapering its QE programme, but rising inflation could lead the Fed to reconsider reducing QE if it is concerned that the economy may overheat if it doesn't take action.
AUD/USD faces resistance at 0.7668. Above, there is resistance at 0.7717. On the downside, 0.7579 is the first line of support. This is followed by support at 0.7539
THE PRODUCER PRICE INDEX AND THE MARKETSThe Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. In other words, the PPI measures the prices offered to manufacturers of goods and services, in contrast to the CPI which measures the prices consumers (end-users) pay to obtain the good or service. The prices included in the PPI measure the first commercial transaction for products and services. This was the main reason for compiling such an Index in the first place, i.e. to measure price changes in goods sold in primary markets before they reached the final stage of production at the retail market level. Overall, the PPI is another indicator of the purchasing power of money and is an important tool in the design and conduct of monetary and fiscal policy.
As you can guess, an increase in the PPI would signal that sellers are obtaining higher prices for their products and services and as a result, producers have either chosen to increase their price margins or they are witnessing higher demand for their products and services. To confirm which of the two holds we need to observe the CPI inflation over the past months. If the CPI inflation is in line with the PPI inflation, then we can confirm that price increases are due to higher demand and not because of higher margins.
Even in the case of higher margins, the PPI serves an important cause: if producer prices have increased due to higher margins then we can expect that CPI prices (i.e consumer prices) will also be increasing in the future. Hence, the PPI can also serve as a proxy of future inflation.
The rationale in regard to how the PPI affects stock and currency markets is similar to the usual CPI. If the PPI figure is higher than expected then firms are expected to generate higher profits, hence the stock market should rise. In contrast, if the PPI is lower than expected, the stock market should drop. Regarding the stock market, if the currency market expects a high PPI growth rate, then the currency should depreciate. Otherwise, if PPI is higher than expected and abides with the CPI path the currency should rise. Note though that the reactions should be much smaller compared to CPI ones, for the simple reason that the PPI is viewed as a precursor of the CPI.
This prediction is supported by the market behaviour on September 12, 2018. The PPI came out less than expected, at 2.3%, compared to expectations of 2.7%. This prompted a negative reaction in the FX market, as the Dollar Index dropped by 5 pips. Similarly, the USA500 also dropped by 1 point on the announcement. While the market moved in the expected direction, the price volatility was not as large as in the CPI case.
DR. Nektarios Michail
Market Analyst
HotForex
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