Commodities: Past the trough – HSBC

Research Team at HSBC, notes that the global commodity prices have risen by 26% since January 2016 and oil prices are at the highest level in over a year and HSBC sees that commodity prices as likely to be past their trough.

Key Quotes

“The lift in commodity prices has significant implications for Australia. For inflation, the impact should be expected through a number of channels. The rise in oil prices should have a direct impact on inflation, by lifting petrol prices. There are also second round effects through the impact on transport and other energy costs.

Higher petrol prices could weigh on household disposable incomes, slowing consumption growth. However, for Australia, the effect of commodity prices on CPI inflation may also extend through another, less common channel, given the larger role the resources sector plays than elsewhere. Indeed, the broader lift in commodity prices should increase Australia’s national income growth, supporting corporate profits, tax revenues and wages and, in turn, underpinning domestic inflation. This is clearly illustrated through the strong positive correlation between Australia’s terms of trade (the ratio of export prices to import prices) and unit labour costs (think wages).

We show that if oil prices hold at the current levels, y-o-y CPI inflation could be back in the RBA’s 2-3% target band by Q1 2017. The direct effect plays a clear role. At its trough in Q1 2015, falling petrol prices were a 0.8ppt drag on the CPI. Second round effects, through higher transport costs, should also add to inflation over time. The broader lift in commodity prices is also likely to see a pick-up in nominal GDP and the terms of trade, which could support wages growth. As we have argued recently, low inflation is partly the result of the mining downturn in recent years.

Taken together, these factors suggest that Australia’s CPI inflation is likely to be past the trough. Our central case sees the RBA on hold in coming quarters. While there are similar forces at work in New Zealand, we expect the RBNZ to deliver one more cut in November, before holding steady.”