ASX to fall as RBA’s inflation problem rattles nerves Cecile...

ASX to fall as RBA’s inflation problem rattles nerves
Cecile LefortMarkets reporter
Jun 23, 2024 – 1.23pm


Shares are poised to slip on Monday as investors brace for a possible acceleration in inflation that could tip the Reserve Bank closer to raising Australia’s cash rate at a time when other central banks are easing monetary policy.

Futures indicate the S&P/ASX 200 will open 0.2 per cent lower following a 0.9 per cent advance last week, which brought the benchmark within 115 points of resetting its all-time high of 7910.5 achieved in April.

The Dow Jones Industrial Average finished flat, but both the S&P 500 and the Nasdaq Composite dropped 0.2 per cent. Nvidia shares fell 3.2 per cent on another wave of selling and the expiration of $US5.5 trillion ($8.2 trillion) worth of Wall Street options bets.
S&P 500 gains of 14 per cent this year have been primarily driven by a handful of mega cap stocks linked to the artificial intelligence boom, defying delayed expectations of US rate cuts as the world’s biggest economy grapples with stubborn inflation.

In Australia, forecasts for the monthly consumer price index indicator to be released on Wednesday suggest an acceleration in the pace of annual inflation to 3.8 per cent in May, from 3.6 per cent in April.


“Any slight pick-up will be a concern for the RBA and therefore markets,” said George Boubouras, head of research at K2 Asset Management. “The governor has made it clear that they need to see clear signs of falling prices pressures over a number of months, which is proving to be a policy challenge.”

He said strong fiscal stimulus by the federal and state governments, a tight labour market, and resilient consumption amid solid global activity made the RBA’s job difficult.

Prashant Newnaha, a macro strategist at TD Securities, said the central bank would not be happy to see inflation quicken. “We see upside risks to our forecast as services inflation has been stickier across other G10,” he said. TD is also pencilling in a 3.8 per cent result for May.

Economists caution that the survey is only considered partial data, but even so, it will provide insight into how services inflation is unfolding through the June quarter.
Filter through the economy

Services inflation is agitating many central banks because it is proving far more difficult to tame.

The RBA last week left the cash rate on hold at 4.35 per cent, as expected, as it waits for its 13 rate increases to filter through the economy and arrest high inflation.

But with the CPI at 3.6 per cent, well outside the RBA’s 2 per cent to 3 per cent target, the June quarterly inflation report – to be released on July 31 – will play a deciding role.

Money markets imply a 14 per cent chance the RBA will lift the cash rate to 4.6 per cent at either the August or September meetings. Markets are fully priced for a rate cut in July next year.

Westpac estimates the May CPI indicator will hit 4 per cent.
“This will be the first time since September 2023 that the annual rate of inflation in the monthly CPI indicator is running faster than that of the quarterly CPI,” said Besa Deda, chief economist of Westpac’s business bank unit.

Commonwealth Bank and National Australia Bank are below consensus at 3.7 per cent and 3.6 per cent respectively, due to a large predicted fall in volatile travel prices.

RBA deputy governor Andrew Hauser will appear on Thursday at the A50 Australian Economic Forum in Sydney. He is likely to provide insights about the central bank’s thinking on the trajectory of interest rates and comment on how comfortable it is with the May inflation result.

Offshore, the highlight of the week is Friday’s release of US May personal consumption expenditure, the Federal Reserve’s preferred measure of inflation.

TD expects core PCE, which excludes food and energy, to slow to 0.1 per cent growth, the lowest this year, following a 0.25 per cent gain in April.

Meanwhile, the first US presidential debate will take place on Thursday with the risk that threats of an intensified tariff war under a second Trump administration could rattle sharemarkets.

Across the Atlantic, investors will be monitoring the first round of the French parliamentary elections on Sunday for clues on a far-right win.