Daily Commentary BY THE CURVE TEAM –

Domestic Inflation & US Yields

26th of April, 2018

The Q1 CPI printed just below expectations, while the US 10-year note traded through a key level.

The first quarter of this year saw the CPI rise 0.4%, marginally below surveyed expectations of 0.5%. This takes the annual number to 2% in rounded terms, the highest in more than two years.

RBA Governor Phillip Lowe altered the growth forecast to 1.75% in a recent SoMP. Considering this, the 2% annual figure looks pretty good on the surface but the economy is still on a light simmer. The Q1 CPI figure was driven largely by government-influenced sectors, which again highlights the need for consumer drivers like wage growth to emerge before we see stronger inflation.

Further to this point, CPI in the private sector of the economy is running at just 1.1% excluding volatile items. On the other side, inflation in utilities, health, education, alcohol and tobacco are all significantly up so most of the inflation drivers are from the government-influenced sectors. Wage growth will continue to be topical because we need something at the consumer level to drive domestic services higher.

Over to the US, the 10-year treasury note is trading above the 3.00% barrier for the first time since 2014. We touched on this briefly last week but the rise in yields translated to another poor session for US equities. Despite the US yield curve flattening, the market expects the 10-year yield to continue its rise but maybe not at the speed we have seen in the short-term LIBOR or even in the two-year note.

James Winder

Associate Director