The Australian sharemarket is expected to open lower on Monday, with futures pointing to a decline. This follows robust economic data fuelling speculation that the Reserve Bank of Australia (RBA) will raise interest rates this week. The S&P/ASX 200 Futures Index indicates a fall of 60 points, or 0.7 per cent, continuing last week’s downward trend, but despite this, the market finished January up 1.8 per cent, its best monthly performance since August. Investors are anticipating a 25-basis-point increase in the cash rate to 3.85 per cent on Tuesday, driven by stronger-than-expected inflation and employment figures.
Financial markets have priced in a 74 per cent chance of a rate hike, which would be the first in over two years. This marks a significant shift in sentiment from just two months ago, when analysts generally expected further policy easing. While the RBA cut the cash rate three times last year, governor Michele Bullock has cautioned that rates could rise again if inflation remains stubbornly high. Economists at Citi anticipate that the governor will maintain a hawkish tone, suggesting that inflation remains too high and that the board is committed to bringing it down to the 2 per cent to 3 per cent target band.
The immediate focus is on Tuesday’s decision, with money markets currently pricing in two to three quarter-point increases throughout the year, although economists remain divided on the necessity of multiple hikes. Commonwealth Bank’s head of Australian economics, Belinda Allen, noted that while the economy has shown more momentum than anticipated, corporate and government borrowing costs have already been trending higher since November. Investors will have further opportunity to assess the central bank’s outlook when the governor appears before the House of Representatives in Canberra on Friday.
Globally, volatility in the US and shifts in monetary policy are adding complexity to the outlook. Wall Street retreated on Friday as the US dollar rallied. More than 1500 companies are set to report results this week, including technology giants Alphabet and Amazon. The Dow Jones Industrial Average fell 0.4 per cent on Friday, while the S&P 500 was down 0.4 per cent and the Nasdaq Composite dropped 0.9 per cent.
