Technical Analysis

Australian December services PMI 47.3 (prior 47.6) & Composite 47.5 (prior 48.0)

We had the flash reading for these back in mid-December:

  • Australian preliminary December PMI: Manufacturing 50.4 (prior 51.3), services 46.9 (47.6)

These are from Judo Bank / Markit. We had the manufacturing reading earlier this week:

Ugly services PMI. Higher interest rates seem to be biting.

Commentary from the report (in summary):

  • sub-50 readings for business activity, outstanding work, exports and new business activity
  • Australia’s service industries boomed in 2022 and are now slowing down as higher interest rates and the rising cost of living crimp demand. It is unclear how much further service sector activity will need to slow before the RBA feels comfortable enough to pause its tightening cycle. The December report is consistent with a soft landing for the economy in 2023. The question remains if this will be adequate to bring inflation back to the RBA’s 2% to 3% target band by 2024.
  • services sector employment index has been strong throughout 2022 with index readings in the mid-50s. Given the dominance of service sector employment in the economy, this index will be critical to Australia’s economic prospects in 2023. If the demand for labour contracts and we see higher unemployment emerge later in the year, the RBA should be satisfied that tighter monetary policy is working to reduce wage and inflation pressures across the economy.

On inflation developments:

  • “Despite the slowdown in demand and activity evident in the latest PMI results, the price indicators continue to point to elevated inflation pressures. Input costs are easing, in line with lower commodity prices, but the extent to which service sector costs have fallen is much less than we are seeing in the manufacturing sector. Domestic energy and labour costs are keeping upward pressure on prices within Australia’s service industry. As a result, the prices charged index remains well above pre-COVID levels at 57.2. This suggests inflation will remain well above desired levels well into 2023.”

If the CPI remains elevated the RBA will remain in tightening mode. The Bank only has two (official) jobs, its mandate requires the bank chase full employment and stable prices. Stable prices are expressed by the RBA as a 2 to 3% band for inflation. As I posted yesterday, its currently MUCH higher.

If you can look at those graphs and see inflation back in the target band anytime soon, please let me know in the comments. I am not so optimistic.

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