Friday: ANZ Research sees two RBA hikes

The price of Brent Crude rises back over $100 US dollars a barrel, as Iran's new leader

vows to keep the straight of all news closed, US stocks for, and ANZ research upgrades its

RBA call to hikes in both March and May.

That's coming up in our five things in five minutes on Friday, March the 13th, and then

now deep dive interview, ANZ economist Diraj Nim analyzes how well placed India is to withstand

a prolonged oil price shock.

The problem is that the Indian central government at the moment is already sort of fighting

a bit of a fiscal constraint in the sense that they already have announced a bond supply

program which the market does not like.

But first in five and five with ANZ, ANZ research has upgraded its Reserve Bank of Australia

call to a 25 basis point hike in March, followed by another in May.

ANZ's senior economist, Adelaide Timberl, says the Middle East conflict is one of a number

of pressures.

We consider that the most immediate and clearest impact of that on Australia is higher inflation.

There will also be some demand destruction through the effects this will have on disposable

incomes.

But the timing and magnitude of that side, which tends to be more disinflationary, is less

assert.

We are also coming into 2026 from a stronger starting point than expected, with inflation

above target, Reserve Bank viewing the labour market as tight, and the Q4 GDP data from

last week showing that GDP was above what the Reserve Bank would consider potential growth.

So all this has come together to make it very likely that the Reserve Bank would have

fit to high rates this year either way, and adding the risks associated with the Middle

East conflict on Australian inflation has probably just poured forward the next move.

As of 4 AM Sydney Melbourne time, the S&P 500 was down 1.1%, while the NASDAQ was down 1.3%.

The Dow was down 1.2%.

The US 10 year yield was up 3.5 basis points at 4.242%, West Texas and to immediate futures

were up 8.8% at $94.87 US barrel, Brent Crude, just briefly went over US $100 a barrel

earlier this evening.

The Dow was down 1.1% at $5,122 US, the US dollar index rose 0.4%, the Aussie dollar down

0.9% at 70.88 US cents with that risk appetite off, while the Kiwi fell 0.9% to 58.60 US

cents.

2.

Aside from the straight of whole moves, attention in markets will swing tonight to US consumer

price inflation data, which aims at economist Bunsy Muttavani says will be the last piece

of the puzzle before the Fed's decision next week on interest rates, which is expected

to be a whole.

Core PC inflation will have accelerated slightly as prices typically tend to be reset by businesses

at the start of the year.

We have seen some degree of firmness in January CPI and PPI data, so these will likely

feed through to the PC inflation as well.

Within the January PC inflation data are likely to be less relevant, given the current

environment.

The Fed will be focused on future inflation outlook rather than drawing comfort from

data over a month ago.

Even uncertainties have risen following the surge in energy prices, and we think the

FOMC will point to these uncertainties as a reason to keep rates on hold at its meeting

next week.

3.

So back to that RBA record challenge, so why wouldn't the RBA just look through the oil

price shock?

Is it late again?

There is a possibility that they do try to look through some of the oil price shock

impacts from the Middle East conflict, but given the context in this cycle, which is

that we're already at above target inflation, we already have other inflationary risks,

the tolerance for looking through global shocks may be next lower for the RBA this time

around.

4.

New Zealand is some downside risk to growth at the end of last year, as Q4 manufacturing

sales volumes fell 0.5%.

ANZ senior economist Matt Gott had been expecting a rise and says the headline was disappointing.

Having said that, it wasn't entirely negative.

Most of the negativity was due to dairy and meat manufacturing, which can be pretty

volatile from one quarter to another quarter, depending on what farmers are doing with livestock,

and in this case it looks like they've been holding livestock back, given the good grass

growing conditions.

Outside of that, we saw some growth in a non-food manufacturing in the quarter, which

suggests manufacturing is still passing the worst.

5.

India's inflation rate rose as expected in data out overnight, in February to 3.2% from

a year ago.

2.7% in January, but core CPI inflation was unchanged at an annual rate of 3.3%.

ANZ economist Duresh Nim says that's a good starting position, heading into the oil price

shock.

Oil prices is one of the most important global variables, as far as in the economic

stories concerned, because at the same time, cuts, growth, adds to inflation, wide

vertical and account deficit, stretches of fiscal, and you know, weighs on the currency.

And this particular shock is no different, especially because of its intensity and the

uncertainty for how long it could last or how much more severe can it get.

So there is a clear upside risk to inflation going forward from the current oil price

shock, but we have to acknowledge that India has entered this shock from a place of

strength, as in the current inflation profile of India is actually very encouraging, from

the point of view of core inflation remaining below 2% and headline inflation remaining

below 3%.

2.

Duresh Nim there, who we stay with for our deep drive interview, and he looks at

India's oil marketing companies, the government and how households are placed to handle higher

oil prices for a considerable period.

India's macro buffers are pretty strong, going into this oil price shock in the sense that

growth is above 7% inflation is quite benign, but the ability to withstand this shock would

really depend on the financial buffers that various economic players in the economy have.

And from an India perspective, the three most important ones are the oil marketing companies,

the government and the consumers or the households.

Now when you look at the oil marketing companies, they have been quite profitable in the last

couple of years, because they had kept the pump prices unchanged while global oil prices

had eased a bit, so they were earning somewhat extraordinary profit.

But we assess that even if the oil prices were to average about $80 a barrel through

2026, they would not be able to keep the pump prices unchanged for any longer than 8 to

9 months.

And if the oil prices were averaging much higher at about $100 a barrel, that cushion evaporates

in less than three months.

I think the basic point here is that while oil marketing companies are important stop-gap

in India's high oil price, high inflation narrative, they have a very finite capacity to

absorb losses from higher crude prices without passing them on to, let's say, the government

in terms of excite cuts, if the government ready steps in or consumers in terms of higher

pump prices.

So how well placed is the government to support the economy to withstand the shock?

Right.

I mean, for the government, what essentially matters is how much of a fiscal space it has

to absorb the shock and prevent it from being transmitted to households.

It can do a couple of things.

For example, it can offer an excite cut on fuel to the oil marketing companies, which

would lower its tax revenues, or it would have to increase the fertilizers subsidies.

And the petroleum subsidies, which are linked to domestic cooking gas, to prevent an inflation

in food and in inflation in general household items, and to generally sort of prevent declining

purchasing power of the economy.

Now the problem is that the Indian central government at the moment is already sort of

biting a bit of a fiscal constraint in the sense that they already have announced a

bond supply program, which the market does not like, and the long term market interest rates

have already climbed.

At the same time, the new GDP data that has come out of India estimates the size of

the nominal GDP to be smaller than the old series did.

So both the fiscal deficit and the debt targets as a share of GDP are already looking a bit

stretched.

So while the government could have made it to its targets, you know, with some expenditure

cuts, now the challenge is a lot more compounded because they will have to increase fertilizers

subsidies, domestic cooking gas subsidies, and maybe even offer an excite tax cut if oil

prices remains very high.

Now, the other key economic player is households.

So in a perfect world, you'd hope that household savings rates have built up a big enough buffer.

Is that the case in general and in India though?

It really is context dependent.

I mean, when you, for example, think about the Russia Ukraine shock to oil prices Indian

households were coming from a place of strength because financial savings had increased during

the pandemic and they were drawing them down to fund consumption.

They were still elevated, but as it happens now and over the last couple of years, especially

household financial savings have declined as a share of GDP.

And while they have recovered a bit in the last few quarters, they have not certainly gone

back to the levels that prevailed before the pandemic or any semblance of comfortable

levels of financial household savings, which means that their ability to cushion high

interest rates, high inflation is naturally much lower than it would have been where their

financial buffers were strong.

Dear Ajanim there, I'm Bernard Hickey, that was five and five with ANZ for Friday,

March the 13th.

Catching next week with right decisions from the Fed, the European Central Bank and the

Bank of England.

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