ASX rallies as ‘very good’ inflation data sparks rate cut bets

Investors have cheered signs of a slowdown in inflation, sending Australia’s sharemarket higher despite falls on Wall Street, amid growing bets of an interest rate cut as soon as next month.

The ASX on Thursday reversed an early slide to end the day 0.8 per cent higher, after figures showed underlying inflation – which excludes irregular or temporary price changes – fell to 3.2 per cent in the year to November, down from 3.5 per cent in the year to October.

Even though headline inflation rose from 2.1 per cent to 2.3 per cent, the underlying figure, also known as the “trimmed mean,” is the key number for the Reserve Bank, which targets an inflation rate of 2 to 3 per cent. The news emboldened traders who see the economy heading in the right direction.

Investors are increasingly anticipating Reserve Bank governor Michele Bullock will cut interest rates next month.Credit: Oscar Colman

Investors are betting an interest rate cut next month is more likely, with money markets implying there is a 74 per cent chance of a 0.25 percentage point cut in February, up from a 67 per cent chance on Tuesday.

Markets are pricing in three official interest rate cuts over 2025, which would take the cash rate from its current level of 4.35 per cent to 3.6 per cent.

The S&P/ASX 200 gained 64 points, or 0.8 per cent, to 8349.1 points at close, with the mining and finance sectors the biggest winners. It followed an early retreat, spurred by losses to US stocks triggered by rising yields in the bond market, before rallying shortly after inflation data was released.

AMP chief economist Shane Oliver called the underlying inflation data “very good news” for Australian households, saying they “add to the possibility” of an interest rate cut in February.

“Economists and the RBA won’t look at the headline number but the trimmed number, and it went down,” Oliver said.

“It’s still too high and we want to see it lower, but it’s going in the right direction, so investors will always try to anticipate.”

Shane Oliver said Wednesday’s inflation data was “very good news” for Australian households.Credit: Peter Rae

Nick Twidale, ATFX Australia chief market analyst, said the inflation data helped the argument for a rate cut, and he expected the RBA to become a “touch more dovish” in their future messages to the sharemarket.

“The headline number was slightly higher, but the real data that most of us are looking at was lower,” Twidale said. “It brings the curve a bit further forward.”

Hopes of an RBA rate cut were also buoyed on Christmas Eve, when minutes from the RBA’s December meeting showed the bank would be inclined to lower interest rates if future data suggested that inflation was continuing to ease.

“If the future flow of data continued to evolve in line with, or weaker than, [the board’s] expectations, it would further increase their confidence that inflation was declining sustainably towards target,” the minutes read.

“If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness.”

Josh Gilbert cautioned against hopes for a rate cut in February.

Among the factors that might dissuade the RBA from an interest rate cut on February 18 is rising job vacancies, which grew in the three months to November for the first time since May 2022.

Investors will also be on the lookout for any surprises from the December employment reports and the December quarter inflation data, due to be released on January 16 and 29, respectively.

eToro market analyst Josh Gilbert cautioned against the probability of a February rate cut, saying “everything needs to match up” for that to occur.

“We’re seeing progress on inflation, but what we’ve seen from Michele Bullock since starting as Reserve Bank governor is a hawkish stance – she won’t be in a rush to cut rates,” Gilbert said. “There’s an overarching feeling that rates could stay on hold.”

Major banks are divided over whether the RBA will cut interest rates in February, with Commonwealth Bank economists predicting a rate cut next month, while others expect a reduction later in the year.

CBA economist Stephen Wu described the inflation data as “very positive news” for inflation during the December quarter, highlighting an unexpected fall in the cost of new dwellings.

Nomura’s Andrew Ticehurst said the inflation figures increased his confidence in the firm’s “base case” that there would be a rate cut next month, adding that next week’s figures on the labour market would be key.

“A rebound in the unemployment rate – which we expect to be reported next week – would further add to that case,” he said.

No sector performed better on the ASX than the miners on Wednesday, which were trading positively in the morning before surging with the rest of the market.

BHP (up 1.8 per cent), Fortescue (up 1.9 per cent) and Rio Tinto (up 1.1 per cent) all rose, while the Perth-based Bellevue Gold (up 7.1 per cent) recouped some of the losses incurred earlier in the week, after slashing its production targets for the 2024-25 financial year.

Uranium miners Deep Yellow (6.3 per cent) and Boss Energy (down 2.5 per cent) both lost ground following a rally last week.

The Australian sharemarket added by Wednesday lunchtime after an early retreat, with mining stocks the best performers.Credit: Peter Braig

The banks lodged a strong day of trading after an early retreat. Commonwealth Bank, the largest stock on the ASX, gained 1.7 per cent, while NAB (up 1.8 per cent), Westpac (up 1.4 per cent), ANZ (up 1.7 per cent), and Macquarie (up 1.5 per cent) all rose.

Growth in the consumer sector was led by Kmart and Bunnings owner Wesfarmers (up 1.4 per cent) and The Star Entertainment Group (up 5.4 per cent).

Technology was the worst-performing sector, following a slump in tech stocks in the US overnight. It was led into the red by Xero (down 1.8 per cent) and TechnologyOne (down 2.1 per cent), while WiseTech grew by 0.3 per cent.

Block Inc – one of the major beneficiaries of the Bitcoin price surge following President-elect Donald Trump’s November election victory – was a key loser on Wednesday, falling 3.3 per cent. Fellow fintech Zip Co lost 4.9 per cent, while QBE fell 1.3per cent.

Regenerative medicine company Avita Medicine fell 19.3 per cent, after the company downgraded its commercial revenue forecasts for the December quarter amid reduced purchasing activity.

The Australian dollar lowered, and was valued at US62.29¢ at 4.21pm.

Most traded shares on IG Markets.Credit: IG

In the US, the S&P 500 fell 1.1 per cent after giving up an early gain. The Dow Jones Industrial Average dropped 178 points, or 0.4 per cent, while the Nasdaq composite tumbled 1.9 per cent.

Stocks dropped under the weight of rising yields in the bond market, which jumped immediately after the release of two encouraging reports on the economy. One said American employers were advertising more job openings at the end of November than economists expected. The other said activity for finance, retail and other services businesses grew much faster in December than expected.

Nvidia swung to a loss of 6.2 per cent and became the heaviest weight on the S&P 500. Losses for Amazon, Tesla, Apple and Microsoft were the next-strongest forces dragging the index lower.

with AP

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