Publication of inflation and retail sales data to set the tone for financial markets

Whether the RBA lifts the cash rate a 14th time may largely hinge on the content of critical economic data to be released this week which will steer the direction of Australia’s financial markets.

Financial markets will be driven by a spate of economic data this week, as figures reveal whether the crippling inflation that dented spending powers of households and businesses – and forced the Reserve Bank to launch an aggressive campaign of interest rate rises – has waned.

While other markets, most notably the US, have declared victory over inflation, Australia’s policymakers have left the door ajar for another interest rate rise, although markets have deemed rate rises to be over.

The Australian Bureau of Statistics on Wednesday will publish the inflation print for November, with analysts warning an upside surprise may force a 14th rate rise that in turn drags Australia’s equity market down.

Inflation in October cooled more than markets expected, but the monthly figures are often volatile and the Reserve Bank typically prefers to await quarterly prints, with data for the three-month December period due on January 31.

The Reserve Bank board, led by governor Michele Bullock, will forensically examine the economic data coming out this week. Picture: Martin Ollman

A lower-than-expected inflation read for November will temper concerns that the RBA could elect for another rate rise when it meets next month, and indeed a faster fall in inflation could accelerate the move to a cut in rates.

“Monthly inflation will likely decline further in November thanks to a drop in petrol prices across the capital cities. Other electricity subsidies will also have an impact on the overall headline CPI for the month,” Citigroup. head of economics Josh Williamson said.

Markets are pricing in two interest rate cuts this year, though there is division around the outcome, and data from the US and Europe last week could affect the RBA’s rates outlook.

The US economy added an extra 216,000 jobs in December, beating estimates of 170,000, and helping the unemployment rate to remain steady at 3.7 per cent, lower than the 3.8 per cent expected by economists. Unemployment remains near historic lows.

Financial markets had been increasing bets on aggressive rate cuts in the US this year after the Fed came close to declaring victory in a two-year battle to contain high inflation in December.

US consumer price growth has fallen to 3.1 per cent and interest rates are at the highest since 2006, leading the central bank to suggest that at least three rate cuts were forthcoming this year.

After further evidence of the resilience of the US economy, investors trimmed bets that the Fed will quickly cut rates. The yield on 10-year US treasuries, which reflect government borrowing costs, rose by 8 basis points to 4.06 per cent, a three-week high.

The global battle against inflation may also not be over. Inflation in the eurozone rose from a two-year low at the end of last year, as an increase in energy prices pushed up price growth for the first time in six months.

Average consumer price inflation rose from 2.4 per cent in November to 2.9 per cent last month in the 20 countries that make up the single-currency area. The rise was widely expected.

Australian retailers will be hoping for a softening of the interest rates pain. The prospect of a 14th rate rise has sapped consumer confidence and meant many households have deferred spending – hurting businesses, particularly retail firms. Many retailers pinned their hopes on a strong Christmas sales period and traders will be keen to see the November retail sales figures published by the ABS on Tuesday.

Traders have positioned for an expected large increase in retail sales in November from the previous month as consumers spent ahead of Christmas. Should this fail to materialise, retail stocks are likely to see a sell-off.

Anecdotal evidence suggests the retail sector failed to see sustained demand over the festive period, which could force heavy discounting to lure shoppers and prevent a backlog in supplies.

The market is also bracing for the ABS to release building approval numbers for November. The building industry is struggling amid soaring inflation and interest rates, which has dented applications for new dwellings, and signs of continued weakness could sap employment. Unemployment is slowly beginning to edge up as the economy cools, but prolonged weakness across construction could add to Australia’s housing affordability crisis.

Building approvals fell as much as 8 per cent in October from the previous month, data from the ABS showed.

Economists have said Australia is not building enough homes to meet demand, with house prices tipped to grow again in 2024.

Additional reporting: the Times