Aussie market eyes China for commodity revival

A week of economic data will leave a long-term impression on the transitioning Australian economy with subdued inflation and commodities still playing second fiddle to the orchestral rhythms of China.

According to IG Market's Evan Lucas, expectations here are growing that 2014 will be the year that commodities will return to the winners' cycle, after corn, silver, gold, nickel and platinum all tumbled into bear markets last year.

With 23 commodities finishing last year in the red, Lucas said investment funds would be back.

"Most commodity traders and analysts alike believe this year should see the investment funds returning to the commodities space after two years of fund flows moving out of commodities into equities and other high returning asset classes," he said.

The timing for a revival in Australia's commodity heavy economy would be welcome, with most economists expecting Australia's December quarter inflation report, due this week, to show inflation at mildly subdued levels but not yet plumbing any depths that might draw breath from a reticent Reserve Bank of Australia ( RBA).

The RBA Board will next meet on Feb. 4 -- always a critical beat not to be missed while Australia enjoys record-low cash rates.

According to Annette Beacher, Head of Asia-Pacific Research at TD Securities 2014 so far confirms that ongoing accommodative monetary policy continues to stimulate the interest rate sensitive sectors of consumer spending, finance and most critically - house prices.

"The recent employment report has enhanced expectations for an additional cash rate cut, but just like the U.S. payrolls report, is likely to prove to be a one-off. The RBA Board has time to assess the health of the labor market, and we remain of the view that the next move remains up for the cash rate, although not until the final months of the year," Beacher said.

Released here Monday, the TD Securities-- Melbourne Institute Monthly Inflation Gauge rose by 0.7 percent in December (following a rise of 0.2 percent in November, and an increase of 0.1 percent in October.)

In the year to December, the Inflation Gauge increased by 2.7 percent, following a 2.4 percent rise for the twelve months to November.

Contributing to the overall change in December were rises for fruit / vegetables, tobacco, fuel, and tourism. These were offset by falls in furniture and furnishings, garments, and rents.

Australia's underlying rate of inflation rate is expected to have been about 2.3 percent over last year, within the RBA's target of keeping the inflation rate to within 2-3 percent.

Beacher said, "On our projections we expect this to be the low point for the inflation cycle, although gains from here are likely to be measured, reaching the mid-target level of 2.5 percent by mid-2014."

However, the cyclical forces governing Australia's patchwork economy remained tightly bound to the world's most dynamic economy, where Chinese demand for Australian resources has driven local data. The benign inflation data came as China's economy showed some signs of strength in the second half of last year after a growth slowdown during the first six months.

China's inflation rate was 2.6 per cent in 2013 - below the 3. 5 per cent target set by officials.

For December, inflation here came in at 2.5 per cent compared with the same month the year before.

These have added to the excitement in Australia's property sector as it continues its extraordinary climb and adds further weight to the praise lavished on its recent performance.

Richard Grainger, Director at boutique property platform Sunrise Property Group said, if interest rates remain unchanged and the dollar continues falling it will positively affect key sectors around the country which will have a flow on effect on property prices.

"Last year saw the tension released on the coiled spring of Australian property prices after two years of negative growth.. the time is ripe to get into the Australian market."

With all eyes on China's expected GDP results, Evan Lucas told Xinhua that the world's second largest economy was still Australia 's best friend despite the market 'looking to poke holes in anything that shows signs of sustainability from China.'

"However, I believe China is moving on a perfectly sustainable path; GDP moving to 7 per cent to 7.5 percent over the coming years is perfectly acceptable, industrial production is holding and retail sales are increasing. China is moving towards a consumption nation and this can only be seen as a good thing from a resource-rich nation such as Australia, as the demand for commodities will remain."