Today's Consumer Price Index has lost some of its importance in the wake of the savage sell-off on world stockmarkets in the past two days.
It's as though the markets are telling investors (and governments and regulators such as the Reserve Bank) that the turmoil caused by America's subprime mess and credit freeze, and now looming recession, is much more serious than any one had thought.
It is certainly a big reminder to the RBA board that financial market stability can be as important a factor in containing inflation at times as spending cuts by Canberra and low inflation numbers.
The savagery and indiscriminate nature of the sell-off will mean there's no rate rise on February 5, no matter what the CPI brings today.
A combination of rate rises from banks for business, personal and home loans, plus the uncertainty generated by the market sell-off will be enough to keep the RBA on the sidelines, probably for much of the year.
Australia hasn't experienced a bear market for shares for sometime, certainly not one where the broader economy is doing more than OK.
We have to remember that all this talk of a rate rise is being driven by a strongly performing economy and its impact on resources, which in turn has driven up the cost of doing business and the cost of living.
Macquarie Bank interest rate strategist, Rory Robertson says he still believes the RBA won't move on rates, whatever the CPI number is today.
"As argued here last week, two important (related) things have happened since the RBA Board last met on 4 December," he said yesterday.
"First, the global economic outlook has deteriorated significantly; second, there's been a significant market-based tightening of financial conditions, and it ain't finished yet.
"Most clearly, the synchronised downshift in global equity indexes over the first few weeks of January – now near 15% and counting. Gloomy sentiment is intensifying worldwide.
"Monetary-policy settings in Australia are tight rather than loose: mortgage rates and other intermediary lending rates are higher now than they have been in over a decade.
"Having hiked by 25bp in August and November, and with major banks having topped-up their headline mortgage rates by a further 10-20bp in January, the RBA clearly has room to "wait and see", if it chooses.
"Market assessments of near-term RBA policy will tend to harden after tomorrow's Q4 CPI. Yesterday's modest rise in the PPI in Q4 (up 0.6%) boosted hopes that the inflation report will not contain all bad news.
"Depending on the CPI and upcoming market developments, many observers would view the RBA leaving rates unchanged on 5 February as understandable and sensible. After all, several major central banks already are in easing mode. "
The Bank of Japan left its key rate unchanged at 0.50% yesterday. The Japanese stockmarket has plunged this year and is down close to 30% since its peak in 2007. That reflects the emerging picture of an economy moving steadily towards a slowdown, much in the way the US is travelling.
It's more an unravelling of growth in both markets, which are among Australia's major trade partners.
The strength of activity in the economy can be seen from the latest Australian Bureau of Statistics figures for car sales in December.
They show that sales hit a million vehicles for the first time ever in calendar 2007.
And sales were buoyant in December with a record 91,384 new motor vehicles sold in the month: a rise of 1.1% compared with November when 90,405 vehicles were sold.
Sales for the year were up 11.6% on 2006 with a record 1,049,982 vehicles sold in calendar 2007.
Goldman Sachs JBWere said yesterday that it was retaining its out-of-consensus call for rates to stay on hold through 2008.
"Though underlying inflation will certainly print at an uncomfortably high annual rate on Wednesday, we remain convinced that the RBA will keep rates on hold through 2008.
"The Bank itself has highlighted that financial conditions are already tightening of their own accord, and there is considerable uncertainty surrounding the outlook for global growth. In this environment we see the Bank as opting for a "policy of least regret" – as the RBA clearly has far more to lose from mistakenly tightening into this environment than it does from mistakenly holding off.
"Indeed, if anything, today's softer-than-expected outturn provides further justification for the Bank to leave rates on hold. In particular, relatively contained upstream price pressures create an opportunity for the Bank to revisit its current forecast for underlying CPI inflation to trend back down over 2H08 – thereby massaging the market's inflation expectations."
Australia has had two instances of a bear market for stocks when an economy was growing strongly and both provide very different outcomes:
The first was 1987 after the great crash that resulted in the messy and bitter recession in 1991; the second was in 2002-03 in the aftermath of the collapse of the tech, net and Telco booms and the US slowdown.
The market in 2003 reached a bottom around February-March and recovered slowly and took the best part of a year to begin a solid rebound, which went on essentially, with the odd yearly correction or two, until last November.
Is that what lies ahead of us this time around? Or is it more a case of 1987-91?
