ASX 200 rallies on cooler-than-expected inflation print: Still a ways to go

The Australian consumer price index rose less than expected in October, indicating that pricing pressures could finally be starting to cool.

The monthly CPI rose 6.9% year-on-year in October, down from 7.3% in September and below analyst expectations of an increase to 7.4%.

The most significant contributors to inflation were new dwellings (+20.4%), automotive fuel (+11.8%) and fruit and vegetables (+9.4%), according to the Australian Bureau of Statistics.

"High levels of building construction activity and ongoing shortages of labour and materials contributed to the rise in new dwellings," said Michelle Marquardt, ABS Head of Price Statistics.

A V-shaped bounce

The ASX 200 was trading around -0.40% before the inflation print. The market was handballed a rather weak session from Wall Street after China quashed reopening rumours and ahead of the all important Fed Chair Powell speech on Thursday morning.

The market experienced a sharp upward thrust post inflation print, rallying approximately 36 points or 0.5% by 11:47 am AEDT.

Yesterday, the market closed 0.33% higher from session lows of -0.39% thanks to rumours about China easing its stance on covid-zero.

Today, the market has so far reversed a -0.43% session low and now around 0.3% higher.

XJO intraday chart (Source: TradingView)

Sectors to watch

The market's rebound was rather broad-based. Sectors that were already up for the day such as Materials and Industrials.

While losers such as Healthcare, Staples and Discretionary managed to find some support and bounce off session lows.

The cool inflation print triggered a pullback for bond yields, with the Australian Government 10-year yield falling from 3.64% to 3.61% shortly after the data was released.

This triggered a notable rally for Real Estate names such as Goodman Group (ASX: GMG), Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX).

There was an improvement in appetite for risk assets, with the S&P/ASX 200 Info Tech Index bouncing from session lows of -0.95% to 0.28% at noon.

A ways to go

Globally, inflation remains elevated and far from the central bank target range of 2-3%.

YoY inflation for US (blue), Germany (red), Australia (green) and Japan (orange)

Still, the easing inflation print plays into the Reserve Bank's recent dovish pivot, which favors 25 bp rate hikes instead of 50 bps.

"The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market," said Governor Philip Lowe in a media release for the November monetary policy decision.

Although Lowe noted "the Board expects to increase interest rates further over the period ahead."

This has also been reflected in the ASX 30 day interbank cash rate futures, which expect rates to peak at around 3.8% in October 2023.

ASX 30-day interbank cash rate futures (Source: ASX)