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AUD spikes as inflation data jumps

piles of Australian 100 dollar notes

The S&P/ASX 200 closed down 0.8% at 7261.20, having recovered from being 1.1% down at the open.

The Australian dollar spiked to US71.71c after inflation data surged to 5.1%, the highest annual level for more than 20 years.

ANZ Research now expects the Reserve Bank of Australia (RBA) to hike the official cash rate by 15bp next week, it tweeted, adding that inflation pressures have momentum and have broadened. "A cash rate target of 0.1% is inappropriate against this backdrop," head of Australian economics at ANZ David Plank said. NAB is also forecasting a May increase.

Bill Evans, chief economist at Westpac, recently revised his forecast for the cash rate, suggesting the RBA might raise interest rates by 40 basis points in June amid rising inflation. CBA's chief economist Gareth Aird is backing a rate hike in June.

US futures are rising, while markets across Asia are mixed after a tech-led sell-off overnight in the US left the Dow Jones Industrial Average down 2.38%, the S&P 500 2.82% lower, and the Nasdaq slumped 3.95%, to a one-year low.

Trade the US market before it opens (6pm – 11.30pm AEST) and after it closes (6am – 10am AEST) in addition to its normal hours.

AUD/USD US71.77c vs. US71.45c

Bitcoin US$38,363 vs. US$38,261

Gold US$1899.25 vs. US$1902.25 an ounce

Brent cude oil US$106.09 vs. US$106.40 a barrel

WTI crude oil US$102.56 vs. US$102.99 a barrel

CMC Markets APAC & Canada analyst Azeem Sheriff writes:

Today's consumer prices data (CPI) was the first of two regular data releases that might be likely to impact the timing of any decison to change the official cash rate by the Reserve Bank of Australia (RBA) board, which next meets on 3 May.

RBA Governor Philip Lowe commented in his post meeting statement in the April Board meeting that, “over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs. The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target.”

Therefore, the RBA normalising the cash rate would be contingent on 2 key factors, including today’s CPI figures and also the upcoming Wage Price Index (WPI). 1 down (CPI), 1 to go (WPI Q1 2022 – released on 18 May 2022).

CPI Update Q1 2022

2.1% q/q (actual) vs 1.7% q/q (forecast), previously at 1.3% q/q.
5.1% y/y (actual) vs 4.6% q/q (forecast), previously at 3.5% y/y.

It is a 60% increase on the annual rate, keeping in mind the RBA's target range is between 2 and 3%. CPI is now just over 2% higher than the upper target value, which indicates a rate rise is imminent. This is the highest annual level in more than 20 years.

The trimmed mean, the RBA’s preferred measure of inflation, rose by 1.4% q/q actual vs 1.2% q/q forecast. It is the strongest quarterly increase since 2008.

Post data release, the AUD/USD spiked 20pips and government bond yields also spiked 1-2% on strong CPI actuals beating expectations.

We also need to be mindful that the national election will be held in Australia on 21 May 2022 which might be a consideration as to whether the RBA could hike rates. Will the RBA factor this in? Would it be ideal to raise the cash rate before an election? The RBA doesn't interfere with the political process and would not want to be seen to be doing so.

It would seem more likely for the RBA to begin normalising the cash rate in June post the WPI & elections. Watch this space!

Disclaimer: This is not investing advice and should be read as general information.

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