CHINA PRESS: China Urges U.S. To Stop Copper Investigations

December headline CPI inflation rose 0.2% m/m (seasonally adjusted) to be up 2.5% y/y after 2.3% y/y. The trimmed mean moderated 0.5pp to 2.7% y/y, the lowest in three years. The other measure of underlying inflation, CPI ex volatile items & holiday travel, rose 0.2% m/m to be up 2.7% y/y down from 2.8%. Lower rental, new dwelling, clothing and insurance inflation all helped to drive underlying inflation lower. 

• Services inflation moderated to 3.7% y/y from 4.2%, the lowest since December 2023, and non-tradeables rose 3.0% y/y, the lowest in over three years. The RBA prefers the quarterly CPI data but is likely to be reassured by the moderation in domestically-driven inflation seen at the end of 2024 but 3-month momentum is again picking up in both series and so will likely continue to be monitored closely.
• There was a pickup in goods and tradeables inflation in December with both up 1.4% y/y after being below 1% in November.

Australia CPI y/y%

Q4 CPI measures printed 0.1pp below consensus with underlying measures trending towards the top of the RBA’s 2-3% band but still “some way” from the 2.5% mid-point. The data should increase the RBA’s “confidence that inflation is moving sustainably towards target” as annual rates printed 0.2pp below its November forecasts. There will be updated projections at its February 18 meeting and the timing of 2.5% trimmed mean inflation will be important for its decision. 

Australia CPI y/y%

Source: MNI - Market News/Refinitiv/ABS

• The lower-than-expected Q4 outcome is likely to bring down near-term inflation forecasts but the labour market remains tight with its moderation having stalled, the AUD is softer and productivity growth remains very weak. These other factors may result in the target mid-point still only achieved in mid- to late-2026 and a rate cut pushed out into Q2.
• Q4 trimmed mean inflation rose 0.5% q/q driving a moderation in the annual rate to 3.2% from an upwardly-revised 3.6% in Q3. It excluded electricity and fuel prices and the increase was driven by recreation while housing (new dwellings -0.2% q/q) helped to offset it.
• Services inflation moderated to 4.3% y/y in Q4 from 4.6% but is still elevated and in line with the trend since Q4 2023. It appears to still be moving sideways, while core services picked up 0.1pp to 4.2% y/y and rose 1.1% q/q and continues to prove sticky. The ABS said that rents, medical & hospital services and insurance are keeping services high.
• The RBA noted in the December minutes that “underlying inflation was still too high, underpinned by persistently high services price inflation”. Q4 data hasn’t improved this.
• The ABS noted that without the government’s electricity rebates, prices would have risen 0.2% q/q compared to the 9.9% q/q drop recorded.

Australia services CPI y/y%

Source: MNI - Market News/Refinitiv/ABS

The Australian 3/10 cash curve is hovering near its steepest level since early January and above the upper range it had traded in since late 2022.

• The steepening of the Australian curve has coincided with the recent downward movement in the 3-year yield.
• The 3-year yield is down 30bps since mid-January as RBA easing expectations have gathered momentum.
• RBA-dated OIS pricing is 4-7bps softer across meetings after today’s Q4 CPI data.
• A 25bp rate cut is more than fully priced for April (135%), with the probability of a February cut at 91% (based on an effective cash rate of 4.34%). February was at 76% before the data. 

Figure 1: AU 3/10 Yield Curve (%) Vs. 3-Year ACGB Yield (%) 

Source: Bloomberg / MNI - Market News