市場新聞與洞察

If you look at equity markets in particular, you'd think everything smelled of roses. For the 47th time this calendar year US indices have made record all-time highs and 46 times at record closing highs. Earning season is underway and so far, it is doing what it always does, which is beating the Street 75 percent of the time.

Banking, Tech and industrials are the standouts. And even when you look at the 493 non magnificent 7 stocks on the S&P 500 the gap between the seven and the rest is finally starting to close up. So all is well at least that's how it appears.

However over the next 20 days the risks that are facing global markets cannot be understated. First and foremost is the US presidential election. As we point out in our US 2024 election specials, the margin between Trump and Harris has never been closer.

In fact, most probability markets now have Trump ahead. Predictit for example, Trump leads by three points and on RealClearPolitics it's even larger sitting at 10.8 points. Most of the key states or swing states are statistical dead heat but on average Trump is now ahead by 0.2 at 47.7 to 47.5.

Whichever way you look at it, whoever wins on Election Day, it will lead to disputes and the other side is unlikely to accept the result. The political upheaval will filter through into markets, and we need to be ready for that. What has also been lost in geopolitics and the incredible run in equities is movements in the bond market and the risks around US inflation.

And it is this that we need to take a closer look at. Trends and Key Drivers in US Inflation Blink and you will have missed it, the back end of the USU curve is back above 4%. This is down to several risk factors, The US presidential election being one, employment being another, and then the big one inflation rearing its head in September.

There was an unexpectedly strong rise in CPI inflation for September. So is there some going on here or is it just a false flag? First things first - Core PCE inflation continues to trend at a consistent pace of approximately 2 per cent on an annualised basis.

This suggests that inflationary pressures, while present in some sectors, remain largely in check but risks remain. So what are the keys here? Key Factors on the Inflation Outlook: 1.

Core CPI Outperformance and PCE Expectations: September's core CPI surprised with a 0.31per cent month-on-month (MoM) increase, surpassing consensus forecast of 0.25 per cent. While this unexpected rise is noteworthy, the details of the PPI (Producer Price Index) data suggest a more moderate increase in core PCE inflation, estimated at 0.21per cent MoM for the same period. The issues in the inflation figures however remain in components such as shelter and insurance, which had been driving much of the previous increases, with weather events and housing price volatility expect inflation fluctuations here to persist in the near term.

The upward surprises in the headline CPI data were concentrated in volatile categories like apparel and airfares. Airfares, for instance, rose by approximately 3 per cent MoM on a seasonally adjusted basis. 2. Wage Growth and Labor Market Dynamics: The Atlanta Fed’s wage tracker indicated that wages picked up in September, with the unsmoothed year-on-year (YoY) measure reaching 4.9 per cent, up from 4.7 per cent in August.

Additionally, the 3-month smoothed measure and the overall weighted average both rose to 4.7 per cent, compared to 4.6 per cent in the previous month. Whichever measure you want to use, real wages in the US are growing at about 2.5 per cent. While this wage growth exceeds the rate typically consistent with a 2 percent inflation target (in the absence of significant productivity gains), it remains only modestly stronger and isn't a concern, yet.

It’s worth noting that wage growth may take longer to cool off, particularly given seasonal patterns in early 2024 and the effects of recent labour strikes in sectors like port operations and aircraft manufacturing, both of which have underscored the potential for more persistent wage inflation. Interestingly, the Atlanta Fed wage data revealed a sharp deceleration in wage growth for job switchers compared to job stayers. Normally, job switchers see higher wage increases, but over the past few months, the growth rates for both groups have converged.

This shift may signal weaker demand for labour and could be a key indicator of wage trends in the coming months. However, wages for current employees may lag behind, requiring time to adjust downward, much like how rental prices for new leases often move ahead of existing rents in shelter inflation. This dynamic suggests that wage pressures might remain elevated for a time, particularly if companies raise wages for existing employees to catch up with the now-slowing wage increases for new hires.

The ongoing wage growth for current employees could also keep hiring demand subdued, as firms may focus on managing costs rather than expanding their workforce only time will tell here. 3. Potential Impact of Hurricanes Helene and Milton: The inflationary impact from Hurricanes Helene and Milton are yet to be factored into most forecasts and thus it is important to acknowledge the potential for volatility in certain inflation components. Historically, hurricanes have primarily affected gas prices by disrupting supply chains.

However, there has been only minimal upward pressure on retail gas prices so far. Demand led cost in infrastructure and construction supplies also tend to increase post hurricanes as the clean-up and rebuild takes precedence. Another major CPI component that has historically shown sensitivity to hurricane-related disruptions is "lodging away from home." For example, in the aftermath of Hurricane Katrina in 2005, lodging prices initially dropped before rebounding the following month.

It remains unclear whether the recent hurricanes will affect hotel or recreational service prices in Florida, which were among the areas impacted. September CPI already showed weaker-than-expected data for lodging, and with discretionary spending on services potentially declining, this component could face further downside risks. However, if there is an unusually sharp drop in lodging prices for October, any hurricane-related distortions might result in a bounce-back in November CPI.

This is why we think the market needs to remain cautious on core PCE inflation. Will it stay modestly higher than the Fed’s 2% target over the near term? It's clearly possible.

Then there is the ongoing volatility in certain sectors and potential risks from external shocks like hurricanes mean inflation forecasts could still see adjustments. All in all we remain vigilant that despite the enthusiasm and bullishness in indices risks are building and traders need to be vigilant.

Since writing our Thematic paper for 2025 two of the four major themes have already shook markets in 2025. One has been the inauguration of Donald Trump as president of the United States of America and he nationalistic policies the second is the AI revolution taking a massive left hand turn. With the release of DeepSeek, the AI story may actually become the biggest theme of the year (big call considering it's still January).

We also need to rethink demand and the flow of funds in the wake of DeepSeek R1 disruption. Because if open-source DeepSeek R1 model does deliver performance comparable to OpenAI’s o1 reasoning model at a fraction of the cost (VentureBeat, Jan 20), it raises critical questions for not just AI, but periphery players in the AI chains as well. Here’s why: DeepSeek R1 is reshaping investor perceptions of the AI compute investment cycle.

Reports suggest that the model achieved competitive performance using significantly fewer computing resources and lower inference costs. These efficiency gains have cast doubts on the future scale of AI semiconductor and equipment investments, leading to selloffs across semiconductor stocks. Look at NVIDIA, Meta and closer to home NextDC and the like.

We also know that in China, DeepSeek v3 has already driven AI compute cost deflation. The R1 model leverages advanced techniques like multi-head latent attention (MLA) and mixture of experts (MOE), enabling more efficient training by breaking workloads into smaller parts. This is something o1 has only just begun doing – but at a higher cost load.

While these innovations may not apply universally to all models, they signal a shift that could impact global AI training strategies. Now the caveat the tech boffins point out here is that the greater training efficiency is unlikely to reduce overall compute spending in the near term, as improvements typically fuel more inference demand. But and it is a but, economies of scale always come home to roost in the end.

The consumer will benefit – the investor needs to get picky – who is going to lead and who is going to fall by the wayside? Lets look at the Tech Gorillas like Amazon, Google, and Meta, DeepSeek R1’s efficiencies create a mixed outlook. While these firms develop proprietary models it's important to remember that they also monetise AI services through platforms like Amazon Bedrock and Google Vertex.

Lower training costs could reduce operating and capital expenditures, boosting profitability. Amazon benefits from its partnerships with external developers. Google, meanwhile, leverages its Gemini model for growth.

Meta appears best positioned, as its Llama model generates minimal direct revenue, while its announcement of a 54%-66% year on year increase in capex to $60-$65 billion in 2025 demonstrates its commitment to scaling AI capabilities. This follows news of the Stargate project, which is estimated to add $100 billion in incremental cloud-related capex. These moves underscore that demand for high-performance data centres remains robust, even as cost-efficient AI models emerge.

So what about the hardware developers like NVIDIA (NVDA), Broadcom (AVGO), and Marvell (MRVL) that have been savaged by DeepSeek’s cost efficiencies? While concerns about reduced training investment persist, long-term demand for AI compute remains robust and one player will not be enough to change that. Training requirements, particularly for inference workloads, are expected to drive growth over the next 2-3 years and no model as yet can do that without increased hardware.

The question will be margins – will hardware margins get squeezed from cost efficiencies? Then there is the memory sector, DRAM demand remains steady despite short-term pressures. TSMC, a critical player in AI accelerators, has also faced declines but remains integral to the semiconductor supply chain.

So, no real change here from DeepSeek. Where does this all leave us? The emergence of cost-efficient AI models like DeepSeek R1 introduces both opportunities and risks.

Yes, declining compute costs have mixed implications for the tech sector. On one hand, they alleviate margin pressures for software companies grappling with expensive AI features, potentially accelerating AI integration across product lines. But the risk to this is, lower barriers to entry could intensify competition from agile AI startups, challenging incumbents.

In short these innovations could reshape AI economics, the sustained demand for robust infrastructure, driven by broader AI adoption and multi-cloud trends are likely to overawe the negatives for a positive long-term outlook. Thus investors should focus on companies well-positioned to benefit from these shifts while remaining cautious of near-term volatility.

As we sit here and review the last weeks of 2024, it has dawned on us that 2024 was the year of wanting everything and getting nothing. Now that might sound like a ridiculous statement considering equities across the MSCI world are averaging double digit returns for 2024. In fact in the US they are on track for two consecutive years of 20% gains or more.

So we certainly gained something, but what we have come to realise is that 2024 was a year of anticipation and more anticipation and more anticipation but nothing being delivered particularly here in Australia. So let us put forward our reasoning. 1. RBA Rates – Pricing v the reality At the start of 2024 it's hard to believe that three rate cuts were fully priced into the cash right by December this year.

The pricing versus the reality facing the RBA in 2024 was one reason that we have probably seen muted movements in currencies and bond markets. We do need to commend the Reserve Bank of Australia (RBA) for navigating what has been a perplexing year in 2024. As mentioned, we start the year influenced by global central banks for multiple rates, driven in particular by the U.S.

Federal Reserve. However, by mid-year, pricing shifted so dramatically it moved through 189 basis points to be factoring in not one but up to four rate increases as inflation remained in a state of suspension as sticky components slow the rate of change and has seen underlying inflation holding at 3.5% and above. Despite this the RBA held rates steady throughout the year and has now adopted a dovish tone at its December meeting.

This is key – its 2024 cautious approach is seeing a 2025 pivotal shift and the board is now making it clear that its focus of managing inflation risks is starting to switch to addressing growth concerns. Market forecasting has easing beginning at the April meeting, the range from economists is February through to May 2025. Whenever it starts, the consensus between the market and the theoretical world is the same – one cut will bring several and come December 2025 the belief is the cash rate will be as low as 3.6%. 2.

Labour Market The other factor that has kept the RBA on the sidelines has been employment. IF we were to look at employment in isolation it should be championed. Underemployment, underutilisation and unemployment as a whole is – strong.

It has completely defied expectations in 2024, with employment levels reaching record highs and participation levels for the population and women in particular also at records. It should be noted that part of the reasoning for this is robust immigration, cautious corporate behaviour toward redundancies and then the big one public sector hiring. Surges in hires for education, healthcare, and hospitality, drove public sector resilience, offsetting weakness in private sectors like manufacturing, mining, and financial services.

What could force a change here is the 2025 Federal election – a minority government or even a change of government could lead to fiscal restraint and dampen employment growth, while a surprising downturn in job data could prompt the RBA to expedite rate cuts and increase the amount of cuts as well. Something traders will need to have their fingers on. 3. Record level Wage Growth Wage growth, a key concern earlier in the tightening cycle, moderated in 2024, easing pressure on policymakers both on the fiscal and monetary side.

At one point their wages were growing at levels not seen since record began. However, it did coincide with an inflation level of a similar rate meaning real wages were flat. Looking into 2025, wages remain a concern for rate watches for the following reasons: Minimum wage has consistently followed the inflation rate with a premium suggesting the will increase exceeding 3.5%.

Industrial relations reforms over the past 2 years have embedded wage rigidity. Finally accelerating wage increases in Enterprise Bargaining Agreements are now averaging 4%. Without corresponding productivity gains, these dynamics could challenge the RBA’s assumptions, complicating the path to rate cuts. 4.

Gravity defying markets Earnings multiples of the ASX 200 and its sector have soared in 2024. It’s a reflection of the optimism bordering on exuberance about peak interest rates and an imminent easing cycle. The forward P/E ratio of 17.9x is well above the 10-year average of 16.0x and significantly above its historical average of 14.2x.

Looking into 2025 – yes, these multiples are stretched, but when put into a global context it is understandable and even defendable. For example - Australian equities trade at a 21% discount to the S&P 500’s multiples and expectation for the US market in 2025 is one of further expansion. Thus to sustain these levels robust earnings growth are needed to close the P/E gap.

A 17.0x multiple down from 17.9, would meet expectations. 5. Banks being banks? One area that we note has not just defied expectations but also logic is Australian banks.

The banking sector was the standout performer in 2024. The sector outpaced the broader market by 25%, not hard when you look at CBA which has surged 40% in the past 12 months. It’s even more remarkable when you compare it to the material sector, it has outperformed its cycle peer by 50.2%.

The surge in passive investment flows (exchange traded funds and the like) which is growing at record levels, alongside superannuation sector contributions, fuelled this robust performance considering the Big 4 and Macquarie sit inside the top 20 and make up 45% of the ASX 20. However, this dominance is likely to face challenges in 2025. Key factors to watch include China’s commodity and economic outlook, shifts in risk asset performance, and potential regulatory scrutiny of superannuation’s ties to bank equity.

Coupled with stretched bordering in snapping valuations – the risks underscore the sector’s sensitivity to macroeconomic and policy developments going forward and overdone investment. 6. Iron Ore – heavy lifting Iron ore defied the forecasts in 2024. The expected collapse never truly eventuated, buoyed by cost-curve dynamics and stronger-than-expected demand in the latter half of the year.

Prices exceeded consensus estimates by upward of US$20 a tonne and provided a tailwind for materials. But, and it is a major but, China remains a pivotal factor. Broad-based policy stimulus announcements in late 2024 lifted sentiment, but execution and clarity remain uncertain.

China is looking to stimulate itself in 2025 and that will determine whether materials can close the performance gap with commodity prices in 2025. The other big unknown for Iron Ore – Trump 2.0 and his future tariffs on Australia’s largest trading partner. Signing off 2024 was a year defined by shifting dynamics across monetary policy, sector performance, and macroeconomic trends.

As we move into 2025, investors and traders will face a complex landscape shaped by earnings growth challenges, election-related uncertainties, and potential shifts in global economic momentum and policy. Successfully navigating these factors will come from understanding the macroeconomic signals and sector-specific opportunities they will present.

There's been plenty made this year about gold's incredible rise to new record levels. A point that gold bugs love to point out. As we sit here gold is trading at around US$2700oz having reached an all-time high that was just shy of US$2900oz.

Thus the question has to be asked: where is the limit? And where too from here for the inert metal? The movements over the last five years clearly suggest there is a structural change going on inside the very definition of what gold is. 14.7% in the last six months. 29.4% year to date. 34.2% in the last 12 months A staggering 82.3% in the last five years.

That is telling a story that is different to the original fundamentals we were taught at university and then as fundamental traders. Let's look at that theory: gold usually trades closely in line with interest rates, particularly US treasuries. As an asset that doesn't offer any yield it typically becomes less attractive to investors when interest rates are higher and usually more desirable when they fall.

That still technically holds true, However what has changed is how much central banks are interfering with that fundamental. Since 2022 when Russia invaded Ukraine one of the main reactions from the West was to freeze Russian central bank assets. Since that point the Russian central bank particularly has been buying gold as a form of asset store/reserve.

It has also allowed it to avoid the full force of financial sanctions placed on it. But they're not the only ones doing this; emerging market central banks have also stepped up their purchasing of gold since this sanction was put in place and are rapidly increasing their own central bank reserves. Then we look at developed markets central banks.

The likes of the US, France, Germany and Italy have gold holdings that make up to 70% of their reserves are net buyers in the current market. That suggests something else is afoot. Are they concerned about debt sustainability?

Considering the US has $35 trillion of borrowings which is approximately 124% of GDP, do central banks around the world see risk? Considering that many central banks have the bulk of their reserves in US treasuries coupled with the upcoming unconventional administration in the Oval Office this certainly puts gold’s safe haven status in another light. There are truly unknowns with the upcoming trump administration and gold is clear hedging play against potential geopolitical shocks, trade tensions, tariffs, a slowing global economy, deft defaults and even the Federal Reserve subordination risk So what is the outlook for Gold over the coming years and just how high could it go?

Consensus over the next four years is quite divided: by the end of 2024 the consensus is for gold to be at US$2650oz and then easing through 2025 to 2027 to $2475oz. However there are some that are calling for gold to reach the record reached in September this year before surging towards $2900oz the end of 2025 and holding at this level through most of 2026. And right now who could blame this prediction - Gold bugs believe the confidence in gold’s enduring appeal amid a volatile macroeconomic and geopolitical landscape is a bullish bet.

Expectations for sustained diversification and safe-haven flows do appear structural and with central banks and investors seeking to mitigate risks in an environment characterised by persistent uncertainty, geopolitical tensions, and economic volatility. And it's more than just the demand side that's leading the charge. The supply side of the equation further supports our bullish outlook.

Gold mine production is inherently slow to respond to rising prices due to long lead times for exploration, development, and production ramp-up. Furthermore, major producers avoid aggressive hedging strategies, as shareholders typically prefer full exposure to gold’s upside potential. The supportive fundamental backdrop reinforces that demand from both the official sector and consumers will remain robust, while supply-side constraints provide a natural tailwind for price appreciation.

What we as traders need to be aware of is many investors actually believe they've missed the rally and are wary of buying gold at all-time highs. There are some that believe gold is due pull back even a correction as they struggle to make sense of gold in the new world. The divergence away from yields coupled with unknowns out of China and the US has made them nervous to buy this rally.

But we would argue the pullback has probably already happened. If we look at the gold chart, since the US presidential election gold has moved through quite a reasonable downside shift. Dropping from its record all time high to a low $2530oz.

That decline has clearly been cauterised and the momentum now is clearly to the upside. We can see from the chart that spot prices are now testing the September-October consolidation period. Any clean break above these levels would see it going back to testing the head and shoulders pattern at the end of October-November.

This will be the keys to gold for the rest of 2024. But whatever happens in the short term the long-term trend suggests there is more for the gold bugs to delight in.

There has been plenty of conjecture about where oil is going to go in 2025 and we would suggest that the recent climb in Brent crude oil prices above $80 per barrel reflects an intensifying mix of geopolitical uncertainty. The main 3 uncertainties driving oil have been the impact of the U.S. presidential election, the escalation of the Middle East tensions and anticipation surrounding the OPEC+ meeting on December 1. These factors are clearly shaping short-term oil price dynamics, although some uncertainties have begun to ease, namely the election and the Middle East, but they still hold sway.

Thus let’s explore revised demand and supply projections as the industry anticipates a potential surplus in 2025 and the enactment of the Trump administrations Drill. Drill. Drill policy. 1.

Middle East Tensions Geopolitical tensions in the Middle East have posed a notable risk to the global oil supply particularly the conflicts involving Israel and Iran and the potential disruptions it would cause to OPEC’s 5 largest producers. However, so far, oil infrastructure in the region has largely remained intact, and oil flows are expected to continue without significant interruptions. While exchanges between regional powers remain a potential flashpoint, there is a general consensus that the two countries have stepped back from the worst.

The base case for this point is to assume stability in oil transportation routes and infrastructure. However, as we have seen during periods of unrest this year the consequences of a flare up for global oil prices can be considerable, underscoring the market's sensitivity to even minor shifts in Middle Eastern stability. 2. U.S.

Presidential Election – Drill Baby Drill The U.S. presidential election outcome has had a muted effect on oil prices – so far. This is likely due to President-elect Trump's policies regarding the energy being ‘speculative’. But there are several parts of his election platform that will directly and indirectly hit oil over the coming 4 years.

First as foremost – its platform was built on ‘turning the taps back on’ and ‘drill, drill, drill’. Under the current administration US shale gas and new oil exploration programs have come under higher levels of scrutiny and/or outright rejections. The new administration wants to reverse this and enhance the US’ output.

This is despite consensus showing these projects may return below cost-effective rates of return if oil prices remain low and the cost of production above competitors. Second, although President-Elect’s proposed tariff policies—ranging from 10-20 per cent on all imports, with higher rates on Chinese goods—could slow global trade, the net effect on the oil market is uncertain. Consensus estimates have the 10 per cent blanket tariff reducing U.S.

GDP growth by 1.4 per cent annually, potentially cutting oil demand by several hundred thousand barrels per day. If enacted, this bearish influence could counterbalance any potential bullish effects on prices. The third issue is geopolitics again – this time the possible reinstatement of the "maximum pressure" campaign on Iran that was enacted in the first Trump administration.

If the Trump administration imposes secondary sanctions on Iranian oil buyers, Iran’s exports could drop as they did during the 2018-2019 period, when sanctions sharply curtailed oil shipments. Such a development would likely tighten global supply and drive prices higher. These three issues illustrate possible impacts U.S. policy could have in 2025 and illustrate how contrasting economic and geopolitical factors could sway oil prices in unpredictable ways.

It again also explains why reactions in oil to Trump’s victory are still in a holding pattern. 3. What about OPEC? This brings us to the third part of the oil dynamic, OPEC and its upcoming Vienna convention on December 1.

The OPEC+ meeting presents another key variable, currently the consensus issue that member countries face - the risk of oversupply in 2025 and what to do about it. Despite Brent crude hovering above $70 per barrel, a price point that has normally seen production cut reactions, consensus has OPEC+ maintain its production targets for 2025, at least for the near term. We feel this is open for a significant market surprise as there is a growing minority view that OPEC+ could cut production by as much as 1.4 million barrels.

With Brent prices projected to stabilise around the low $70s, how effectively OPEC+ navigates this delicate balance between production and demand remains anyone’s guess and it's not out of the question that the bloc pulls a swift change that leads to price change shocks. December 1 is a key risk to markets. Where does this leave 2025?

According to world oil sites global supply and demand projections for 2025 suggest a surplus of approximately 1.3 million barrels a day, and that accounts for the recent adjustments to both demand and OPEC supply which basically offset each other. With this in mind and all variables remaining constant the base case for Brent is for pricing to sag through 2025 with forecasts ranging from as low as $58 a barrel to $69 a barrel However, as we well know the variables in the oil markets are vast and are currently more unknown than at any time in the past 4 years. For example: Non-OPEC supply growth underperformed in 2024, which is atypical; over the past 15 years, non-OPEC supply has generally exceeded expectations.

With Trump sworn in in late-January will the ‘Drill, Drill, Drill policy be enacted quickly and reverse this trend? This may prompt a supply war with OPEC, who may respond to market conditions by revising its output plans downward, which would tighten supply and support prices. In short its going to be complex So consensus has an oil market under pressure in 2025 with a projected surplus that could bring Brent prices into the mid-$60s range by the year’s end.

But that is clearly not a linear call and the global oil market faces an intricate array of challenges, and ongoing monitoring of these trends will be essential to refine forecasts and gauge the future direction of prices, something we will be watching closely.

The consensus for the monthly Consumer Price Index (CPI) is for a rise to 3.8% annually in May, the range being 3.6% to 4.0%. This would be the fourth consecutive rise in yearly inflation and would show that not only is inflation ‘sticky’ it could be considered ‘entrenched’ Monthly CPI indicator YoY% This headline will cause large initial reactions from both the FX and bond markets. Considering the hawkishness in which the governor has spoken about getting inflation back to target inside its 18-month timeframe the market will see this as another confirmation that the August meeting is more than just live but a very probable moving event.

You only have to look here at the 30-day interbank market to see long calls are being made although not at a large scale (yet). Since breaking out in late May on signs inflation has become sticky and rate rises rather than cuts are the more likely RBA response in the near term. The pair has become range bound between $0.658 and $0.672.

AUD/USD Which brings us as to why May might be the last CPI rise before it begins a long slow decline into the target range. Notable Influences on May Inflation Fuel: Prices declined significantly in May, more than offsetting April’s increase. However, they rose again during June to over 200c/l.

Food: Inflation eased modestly over the year, with restaurant meals and takeaway food prices moderating on weak demand. Rents: Returned to the average 0.7% monthly after the temporary rent assistance indexation. Clothing & Footwear: April’s unexpected price increase is expected to reverse in May amid ongoing weak retail conditions and the onset of end-of-financial-year sales.

Electricity: Victoria’s rebates expire, with significant price drops anticipated from July due to new federal and state rebates. Firstly, we need to point out that May 2023 has several factors come into play that will create an artificial upside. For example, the expiration of electricity rebates in Melbourne there are several other similar government interventions that also impact in the same way.

Then there is the persistent high inflation in sectors like insurance, which will obscure the declining progress being made in market services inflation. Now we need to highlight that the consensus view is the downward trend will resume in June, consensus forecasting (remembering that there is a lot of data that can shift this ahead of the July 31 release) for Q2 2024 headline CPI sits a 3.6% annually the RBA’s Statement of Monetary Policy (SoMP) is at 3.8%. Prices were unusually weak in May last year, due to significant drops in domestic travel (-15.5% monthly) and fuel (-6.7% monthly), which together account for approximately 7% of the CPI basket.

Large declines of this nature are not expected to repeat this year. Additionally, rebates and changes to electricity prices as energy rebates in Victoria expire, contrasting with the quarterly payments in other states this explains why consensus has CPI falling post May. On electricity pricing expectations are for prices to fall by around 20% in July as new rebates are introduced.

Consensus also anticipates a significant drop in clothing and footwear prices, reversing the April increase. The growth in average monthly spending on clothing and footwear shown in the latest credit card data was the lowest for May since the pandemic. Then you have the seasonal decline in holiday travel and accommodation prices post-school holidays.

Put this all together and it should make plain that Wednesday’s CPI monthly read could be a trap for traders. Why? Yes continued rise in the monthly CPI indicator will be unwelcome news for the Reserve Bank of Australia (RBA).

However, the RBA has emphasised that the quarterly CPI release remains the benchmark inflation figure in Australia. With that being the case – watch for snap back in any bullish moves in the currency. Because although its challenging to predict the trimmed mean CPI based on monthly CPI indicators.

Expectations are that core CPI (which can vary significantly from the quarterly trimmed) comes between 0.8% and 0.9% quarterly. This will be refined post the May CPI but all the same it is likely to be lower quarter on quarter. If we use the RBA’s latest forecasts the headline rate 1.0% on a quarterly basis (3.8% annually).

Trimmed mean CPI is sitting at 0.8% on a quarterly basis (3.8% annually). These are the keys to trading CPI going forward as the underlying detail will be key. First break out market services.

Watch meals out and takeaway, hairdressing services, insurance, sporting and cultural services, and sports participation. Then we need to see modest consumer spending growth for discretionary items and an easing in wages growth this would result in further disinflation for market services, which is paramount to getting inflation back into the target band. CPI Breakdown for May Category April Weight Annual % Change Monthly % Change Expected Annual % Change Food and non-alcoholic beverages 17% 3.8 0.4 3.1 Alcohol and tobacco 7% 6.5 0.0 6.4 Clothing and footwear 3% 2.4 -2.2 2.1 Housing 22% 4.9 0.5 5.3 Furnishings, household equipment & services 8% -0.8 0.3 -0.8 Health 6% 6.1 0.0 6.1 Transport 11% 4.2 -0.7 5.6 Communications 2% 2.0 0.5 1.7 Recreation & culture 13% -1.3 -3.3 -0.1 Education 4% 5.2 0.0 5.2 Insurance & financial services 5% 8.2 0.6 7.6 CPI Indicator - 3.6 -0.3 3.7