Inflation rose 4 per cent in 12 months to May; RBC, NAB push back cut call. August rate hike: Deutsche, UBS. AUD jumps. Harvey Norman tanks. Star lifts on Steve McCann as CEO.
Welcome to the Trading Day blog for Wednesday, June 26. The ASX 200 index closed down 0.7 per cent to 7783 points, with property and consumer discretionary stocks the worst performers.
The Aussie dollar is trading around US66.79c at 5.05pm AEST after the May inflation update.
Goldman Sachs says firmer inflationary pressures will delay the start of an RBA easing cycle to February versus a previous call of November.
Chief economist Andrew Boak also sees a 25 chance that the next move will be a hike if June quarter CPI data on July 31 surprises “materially to the upside.”
Australia's stock market retreats as most US sectors fall amid a switch back to big tech and another blowout in Australia's inflation increases the risk of anther rate hike.
The S&P/ASX 200 index ends down 55.8 points or 0.7 per cent at 7783 after falling as much as 1.1 per cent to 7750.5 after the monthly CPI indicator for May rose 4 per cent on-year versus 3.8 per cent expected by economists.
A 1.4 per cent rise on Tuesday was the biggest one-day rise in two weeks.
The index shied off a downtrend line at 7840 on Tuesday but found support from an uptrend line at 7747 on Wednesday as it consolidates in a symmetrical triangle.
Month/quarter and financial year end flows may dominate before the weekend and Friday's release of US PCE inflation data which could influence US rate bets.
NAB and RBC pushed out their calls for the start of rate cuts in Australia well into 2025 and Deutsche Bank and UBS economists predicted a rate hike in August.
Interest rate sensitive sectors including property and consumer discretionary led fairly broad-based falls with only tech, energy and utilities in the green.
Goodman Group and Wesfarmers were some of the biggest drags on the market falling 2 per cent and 2.2 per cent respectively.
Major Banks fell 0.6-1.3 per cent with CBA and ANZ weakest.
Big iron ore miners outperformed as iron ore rose 2.8 per cent to $106.25 a tonne.
Wisetech rose 2 per cent and Woodside Energy gained 1.3 per cent.
NAB is the latest major bank to push out its RBA rate cut call.
"We now expect the RBA to remain on hold for longer, with a first rate cut now unlikely until May 2025, previously November 2024," says NAB chief economist, Alan Oster.
"From there we see a steady profile of one cut per quarter back to 3.10 per cent, now reaching that point in mid-2026."
ANZ pushed out its rate cut call two weeks ago.
That leaves CBA and Westpac as the only majors expecting November cuts.
UBS is the second cab of the rank predicting an August rate hike from the RBA.
Chief economist George Tharenou says a likely Q2 CPI outcome of 1.0 per cent on-quarter would be "quite uncomfortable" for the RBA, albeit to actually hike the RBA may also need the labour market data to remain resilient.
"However, a material upside surprise for CPI of over 1.0 per cent would be a likely trigger for a rate hike of 25bps in Aug-24.
"This is because it would indicate the prior trend of inflation slowing has ended, and it would also show a re-acceleration of inflation momentum."
"Our new CPI forecasts make a rate hike in August a 'close call'…however, we see enough evidence to change our base case view."
"Hence, we now expect the RBA to hike the cash rate 25bps in Aug-24, to 4.60 per cent." Tharenou also sees risk of a follow-up hike of 25bps, with the most likely timing in Nov-24, and then in Feb-25.
But a hike in Nov-24 would be "optically' difficult to explain" if headline CPI drops back to a 2-handle as seems likely, while a hike in Feb-25 would also be problematic if the unemployment rate has increased further to around estimates of the non-accelerating inflation rate of unemployment of 4.25-4.25 per cent.
"Nonetheless, we still expect rates to remain higher for longer," he adds.
"We delay the timing of the first rate cut of -25bps until Aug-25 from Feb-25, and then another -25bps in Nov-25, taking the cash rate back down by the end of 2025 to 4.1 per cent, which is 75bps higher than our prior forecast."
RBC pushes back its expectation on the start of RBA easing to 2Q 2025 from 1Q 2025 and sticks with its call for a modest adjustment of just two 25bp cuts.
It comes after May CPI was "markedly higher across the board" particularly the key trimmed measure, services and non-tradable components.
"The data suggest upside to the full Q2 inflation print on 31 July following the upside surprise to Q1 CPI," says RBC Australia chief economist, Su-Lin Ong.
"In our view, the RBA should hike but may well tolerate higher inflation to protect the labour market which suggests no scope for any easing until well into 2025 and a cash rate that may well stay on hold for the foreseeable future."
Australia is now the only G10 country where underlying inflation has increased since December to "intolerably high" levels, says Deutsche Bank chief economist Phil O'Donaghoe, who now sees an interest rate hike in August.
"Certainly, our previous call of a cut in November no longer looks feasible," he says in a note after inflation in May rose more than expected. "We now assume the cash rate ends this year at 4.6 per cent. We pencil in the first rate cuts in Q2-2025."
He highlights the scale of inflation acceleration is "material". Trimmed mean inflation – the RBA's preferred measure of inflation – stood at 4.4 per cent year on year in May, up since December. "In contrast, every other G10 country has seen a deceleration in underlying inflation since December," he says.
The August RBA meeting is now "live" for a potential rate hike after another upside inflation surprise, says Citi senior economist Faraz Syed.
He says the main forecast miss was from higher international holiday and travel, but core-services – which excludes travel – also rose more than expected.
"This squarely puts upside risks to RBA and Citi's trimmed-mean inflation forecast of 0.8 per cent for the June quarter," Mr Syed says.
"The market is currently pricing in over 50 per cent chance of a hike in the next two meetings. We see this as fair, and will re-assess our June quarter inflation forecast and our RBA view of no changes to the cash rate this year."
It shouldn't be long before the remaining calls for a November rate cut by the RBA evaporate after blowout inflation data for May.
NAB has put its November rate cut prediction under review.
Volatile travel prices fell much less than expected and account for all of the inflation blowout for the year to May relative to NAB's forecast.
Elsewhere, themes were closer to expectations, particularly on market services.
Ex volatiles and travel did slow from 4.1 to 4.0 per cent and while key services categories remain too strong, they do show some cooling, says NAB senior economist, markets, Taylor Nugent.
But he says NAB's early mapping of the June quarter trimmed mean CPI points now points to a 1 per cent rise versus 0.9 per cent previously expected.
NAB has previously said a rise in underlying inflation of 1 per cent in the three months to June would leave the central bank with little option but to hike rates.
Australia could be one of the very few developed markets to raise rates since the central banks started tightening monetary policy to combat inflation if it continues down its stickier trajectory.
"Forget ‘higher for longer’ – we may end up being the ‘highest for the longest’," says Russel Chesler, VanEck's head of investments and capital markets.
"We weren’t expecting the RBA to cut rates until the second half of 2025, but the hotter-than-expected (May) CPI print today indicates this could be even further away. Worse, with inflation proving to be stubbornly resistant, the probability of the next rate move being up has increased."
June quarterly inflation figures, due on July 31, may show increased headline inflation due to the strong labour market, continuing wage inflation, and high rent increases. "This is the glue that is keeping inflation sticky, and until we see those numbers trending downwards, we’re not going to see any change to the CPI."
The seasonally adjusted annual inflation rate jumped from 3.8 per cent to 4.1 per cent, higher than consensus estimates.
May's 'shocker' CPI report places huge pressure on the Reserve Bank to raise interest rates in August, with all eyes now on the June quarter inflation update on July 31, Betashares Capital's chief economist David Bassanese says.
The seasonally adjusted annual inflation rate jumped from 3.8 per cent to 4.1 per cent, higher than consensus estimates.
"The still high level of inflation across various underlying inflation measures suggest pricing pressure remains broad based," he says. Higher than expected immigration, a public infrastructure spending boom, rising demand for health and personal care services, housing shortages and climate related increases in energy and insurance costs are all contributing to persistent inflation, according to him.
He says Australia's lingering inflation pressures "reflect the consequence of longstanding Federal and State government policy failures in the areas of such as housing, energy and social services".
Any confirmation of the "still bubbling inflationary pressure evident in the monthly CPI reports over recent months" in the June quarter update will leave the RBA with "no choice but to act" and increase the official cash rate – sitting at 4.35 per cent since November 2023 – in August.
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