Australia's 4Q CPI Gives More Reason to End Hikes in Feb
Comment of the Day

January 26 2023

Commentary by Eoin Treacy

Australia's 4Q CPI Gives More Reason to End Hikes in Feb

This note from Bloomberg may be of interest. Here it is in full:

Australia's surprisingly strong 4Q inflation isn't likely to phase the Reserve Bank of Australia. The headline outcome exceeded consensus estimates, but undershot the central bank's forecasts - and isn't a threat to our view that a February rate hike is likely to be the last of this cycle.

The economy’s inflationary pulse largely reflects temporary shocks, centered on utilities and airfares in 4Q. A number of other categories showed continued signs that pressures are set to subside in 2023. The central bank’s expectation for a lift in wage growth - necessary for inflation to be sustained in the target band - looks increasingly vulnerable given emerging signs of a softening labor market. Click on the Text tab for the full report.

Eoin Treacy's view

The Australian Dollar has broken the two-year sequence of lower rally highs against the US Dollar. This is the 7th time since 1985 that the Australian Dollar has rebounded from the $0.60 area. The only time it has sustained move below that level was a brief period between 2001 and 2002. I’ll never forget that time because I felt well off from my success in door to door selling in Melbourne and only got £1 for every A$2.60 when I got to London in the spring of 2000.

The Australian 2-year yield rebounded on this news which suggests traders are a little reticent to give up on the inflationary trend just yet. Nevertheless, the trend is less consistent and a sustained move above 3.5% would be required to signal a return to supply dominance beyond the short-term.

The S&P/ASX Materials Index continues to range in the region of the 2008 peak and tested the all-time high this week. There is scope for some consolidation amid the short-term overbought condition but commodity prices remain quite steady amid China’s reopening. 

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