The RBA has an inflation headache – the August RBA meeting is now live

Head of Research

26 Jun 2024

It’s the big fear for Aussie mortgage holders, but after today’s May CPI data we are now seeing the 24 August RBA meeting as ‘live’. So, while the June employment report (due 18 July) and Q2 CPI report (31 July) will go some way to truly determining a hike - judging by market pricing, a 25bp hike in August is now a real risk and the brave economists out there will be looking at their house call and begrudgingly tweaking it.

Plugging the various CPI components into the Q2 CPI model, and estimates suggest we’re shaping up for a trimmed mean Q2 CPI print of 0.9% q/q, which would be a touch above the RBA’s own forecasts of 0.8%. We see estimates of core services +0.4%m/m and again this is just too high. Headline CPI did fall a touch month-on-month, which is the silver lining, but when we annualize this, we see inflation has risen and progress on inflation is glacial.

We need to remember that there is a stark difference between a psychological token 25bp hike and that of a new hiking cycle – but in the art of being pro-active, the RBA may want to get the real policy rate a touch higher.

We’ll learn more tomorrow when RBA member Hauser speaks (20:00 AEST) and Aussie rates and AUD traders will be glued to every word to see if the pricing in markets is correct. However, the markets have spoken out, and we see the Aus 3yr govt bond +15bp to 4.07% and testing range highs in yield. Aussie swaps price 10bp of hikes (or a 40% implied) for the August RBA meeting, where it holds this pricing through the end of the year, with easing not priced until April 2025.

In equity land, the ASX200 fell 47p on the data but has found better buyers into 7750. The AUD has firmed up in line with rates pricing, although we’re seeing better sellers in the mix as we roll into the meat of Asia trade. AUDUSD hits a high of 0.6679, where we see consolidation and wait to see how London/European desks trade this move. AUDNZD the play for divergence central bank paths, with the cross pushing into 1.0914 – rate differentials are supportive, and this has 1.1000 in the crosshairs. EURAUD looks to print a new closing low in this run, where EUR traders remain risk managers of the impending 1st round election vote on Sunday, but this feels like it pushes lower too.

However, in a world where G10 central banks are either easing or signalling the start of an easing cycle, the RBA, alongside the Norges Bank, is looking more and more like the outlier and that has real meaning for the AUD – if the Chinese yuan wasnt trending lower, the AUD would ripping higher and would be attracting huge pools of global capital.

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