It was another mixed week for financial markets. While the Aust equity and bond markets struggled on the back of the higher than expected inflation print, global markets were able to move higher despite the fact that inflationary pressures (globally) also remain elevated. Given the strength in the domestic CPI print for the 1q24, the ability for the RBA to cut rates anytime soon has gone. With the shift in the CPI dynamic from tradable to non-tradeable goods the ability for inflation to move back with the RBA’s target band remains challenging. Of the 1q24 print, health, insurance and financial services were the key drivers with rent and education prices also producing large uplifts, with eight of the ten top categories non-discretionary items.
While the headline CPI print declined 50bps (y/y) to 3.6% (form 4.1%), core CPI sits at 4.0% y/y with only a small decline (-0.2% y/y) over the year. This shows that despite all the efforts of the RBA in raising cash rates, the excessive fiscal spend by governments (State & Federal) along with higher wage growth continues to impact the outlook for CPI. While the 1q24 print puts any rate cut on the backburner until late 2024, we do not see either the RBA or other major central banks (i.e. Fed, ECB, BoE) increasing cash rates.
While Aust (official) cash rate is 115bps (1.15%) below that of the US, any further increase by the RBA would have disastrous consequences for the domestic economy in our view given the sensitivity of cash rate moves to mortgage rates, the already high costs of living on non-discretionary items, the current (national) personal debt to income (ratio), the weaker consumer outlook and an increasingly benign labour market, which has seen the Un rate move higher over the last 12 months.
What do expect is that the RBA will re-affirm its hawkish stance but take a longer approach to inflation moving lower as the economic growth outlook continues to moderate. While higher for longer rate environment may challenge the Albanese government in the run up to the next Federal election, a recession coupled with higher cash rates could be terminal. However, in our view the government has contributed to the current situation given its poor policy framework around energy particularly. As we head towards the Federal Budget (14th May) this will remain and front and centre
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