Daily Commentary BY THE CURVE TEAM –

CPI Ticks Higher and S&P Expects Few Downgrades

30th of April, 2020

As was widely expected, yesterday’s Consumer Price Index (CPI) figures showed a slight increase in inflation for Q1. Additionally, a Standard and Poor’s media release overnight sees the banking sector likely getting through the downturn without large action on ratings.

Australia’s Q1 CPI release yesterday was broadly in line with market expectations, posting a headline 0.3% increase Q/Q and a 2.2% lift Y/Y. The RBA’s preferred metric- the trimmed mean level of underlying inflation, posted a 0.5% read for the quarter bringing it’s Y/Y level to 1.8%. Despite a pick up the market took the news with a grain of salt with large declines forecast by many for Q2.

The breakdown of the data was similarly in line with market expectations with prices of food, beverages and health goods up and reasonable reductions in the prices of fuels, recreation, travel and clothing. Given a significant weighting in the basket is applied to consumer staples and housing, it is certainly not out of the question that without the sugar hit of  grocery hoarding and a possible fall in household rents that Q2 will post a very different result.

In addition to the CPI release overnight was a very interesting release from Standard & Poor’s. With 3 of the 4 major banks having now released earnings and all so far having put aside large provisions for credit losses it was certainly not out of the question to have expected some action from the rating agencies. Fitch having already acted over a week ago. S&P put some of that speculation to rest with a media release stating they do not expect to see any widespread downgrades.

They did make it clear that is it still early on in this economic downturn and much is still very uncertain so there remains a possibility of action. However, they see positive impacts from measures by the government and RBA.

“we expect that our issuer credit ratings (ICRs) on nearly all Australian banks–including the four major banks–will likely remain unchanged in the event we revise our economic risk score. Increased uplift above the stand-alone credit profiles (SACPs) of the four major Australian banks due to likely government support should offset the impact of a one-notch weaker SACP on our ICRs on these banks, should this eventuate.”

For the non-major banking sector they also see little prospect of widespread downgrades in their core scenario of rising unemployment, lower growth and higher levels of loan defaults;

“We currently assess that the SACPs of up to four other Australian financial institutions may weaken in the above scenario but that we are likely to lower the ICRs on no more than two of them. We expect that likely group support, or capital injections, should offset the pressure on ratings for some of these financial institutions.”

This is certainly a positive for the banking sector but it is far too early to tell if their medium term core scenario will play out. Until we see the impact of the lockdown on consumer behaviour the outlook still remains uncertain.

Matthew Dunshea

Client Relationship Manager