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September inflation surge raises rate hike concerns

Australia has witnessed a robust surge in inflation during the third quarter, sparking concern among policymakers and heightening the likelihood of an impending interest rate hike, potentially as early as the following month. 

Investors have promptly recalibrated their expectations, with futures markets now reflecting a significant shift from the prior 35% estimate to a 66% probability of a quarter-point rate increase to 4.35% in the near future. The data furnished by the Australian Bureau of Statistics revealed that the Consumer Price Index (CPI) experienced a noteworthy 1.2% ascent in the third quarter, surpassing market forecasts of 1.1% and eclipsing the previous quarter’s 0.8% increase. While the annual inflation rate did taper from 6.0% to 5.4%, it continued to outperform expectations, notably in September, when the CPI soared by 5.6% on a year-on-year basis.

Of particular concern is the “trimmed mean,” a meticulously scrutinised metric for core inflation, which also surpassed expectations by surging 1.2% in the third quarter. The annual pace of trimmed mean inflation decelerated to 5.2% from 5.9%.

In response to this data, two prominent Australian banks, namely the Commonwealth Bank of Australia and ANZ, have abandoned their earlier outlook of a rate pause and are now anticipating a quarter-point rate hike in November.

During this period, the Australian dollar scaled to a weekly high of $0.6385, while three-year bond futures descended to 95.68, marking their lowest level since 2011. The prevailing market sentiment is now inclined towards the prospect of rates ascending to 4.46% in the early part of the next year, up from the prior 4.35%.

An interest rate hike in November would position the Reserve Bank of Australia in the exceptional position of being among the few central banks in the developed world actively tightening monetary policy. In contrast, both the U.S. Federal Reserve and the European Central Bank are not currently anticipated to raise rates.

Amy Benson, Founder and CEO of Diolog, commented: “Today’s CPI data is significant for ASX companies, acting as a compass to map out the headwinds facing the retail investor community. With inflation rising a further 1.2%, deepening fears of a potential RBA interest rate hike in 2 weeks’ time, retail investors can be expected to be more conscious of their investment strategies, looking for the most fruitful returns on investment.

“Additionally, the report shows what investors care about the most based on which industries have been hit the hardest. With stocks in real estate, consumer staples, and healthcare experiencing a disproportionately negative fallout and resources, telecommunications, and IT on the up, listed companies including Arena REIT (ASX: ARF), Alterra (ASX: 1AG), and Advanced Health Intelligence (ASX: AHI) will have to pull out all the stops to keep their investors on their books.

“As a result of a turbulent market, ASX companies’ focus on retention strategies has far outweighed proactive pushes for investor acquisition. With AGM season in full swing, the CPI data lands at the perfect time for leaders to reinvigorate how they communicate with their shareholders. Increasingly, investors are becoming alienated by the companies they invest in through lengthy AGM notices – sometimes in the hundreds of pages – and a distinct lack of two-way communication. In fact, we found that 70% of investors are unlikely to read a notice beyond 25 pages, and only 16% of investors attend the AGMs of ASX300 companies.”

With investor interest becoming harder to maintain in uncertain times, today’s 0.3% dip in the ASX should be the wake-up call listed companies need. The next step to buffer any further impact is to strengthen investor confidence by acknowledging the cost trends and subsequent business impact, enhance accessibility to the company, and communicate the roadmap to delivering returns on investment.”

The recent messaging from the central bank has adopted a distinctly hawkish tone. Michele Bullock, the new RBA governor, has conveyed a readiness to explore further rate hikes should there be a substantial upward revision to the inflation outlook. She is scheduled to address lawmakers on Thursday, providing an opportunity to comment on the robust inflation data.

The primary drivers behind the surge in third-quarter inflation in Australia were fuel, rent, and electricity. Fuel prices notably registered a substantial 7.2% upswing from a year ago, partially reversing two consecutive quarters of price declines. Ongoing conflicts in the Middle East could potentially exacerbate inflationary pressures. Additionally, inflation remained elevated in various service sectors, encompassing veterinary care, restaurant meals, and hairdressing, while rents surged by 7.6%, marking their highest rate since 2009.

A noteworthy aspect of the report was the deceleration in the quarterly increase of food prices, coupled with declines in fruit and vegetable prices. Notably, supermarket giant Woolworths observed a significant moderation in the average prices of products it offered during the September quarter, with prices rising by a mere 2% compared to the preceding year.

The central bank’s August forecast indicated that inflation is not expected to return to its target range of 2-3% until late 2025. Updated economic forecasts are anticipated to be unveiled in early November, with some, such as the National Australia Bank, contemplating the possibility of a rate increase to 4.6%. Their expectations are based on the assumption that the RBA will revise its near-term inflation forecasts upward.

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