Evening Wrap: ASX 200 rallies as cooler CPI sparks rate-sensitive bounce

In a nutshell:

• ASX 200 rallies on softer core inflation, with the index surging from about 0.2% higher to 0.9% within 15 minutes of the August CPI print as trimmed mean slowed to 0.2% month-on-month from 0.5% prior, undershooting expectations of 0.3%

• Rate-sensitive sectors lead the bounce, with Real Estate up 3.6% from its lowest level since January 2024

• Much of the RBA's hawkishness already looks priced in, but a single green candle is only the first step towards a bottom

Let's dive in

• ASX 200 was trading around 0.2% higher heading into the 11:30 am AEST CPI print, then rallied aggressively on the slightly cooler-than-expected data. It was up ~0.9% within 15 minutes of the release and trended higher through to the close

• This reiterates some of what we saw in Tuesday's session, when the market flipped from a 0.10% decline to a 0.2% gain in the last thirty minutes of trade after RBA Governor Bullock said at the press conference: "We raised interest rates three times earlier this year, a lot of that effect is still to flow through … What we are predicting, what is the hope here, is that [four] interest rate increases will bring things down." A lot of hawkishness has already been priced in, and slightly softer-than-expected CPI data has been enough to drive an aggressive bid across the market

• The rate-sensitive 3-year yield fell as much as 7 bps but is now down just 1 bp at 4.93%, still well off its 24-Sep high of 5.10%

• Battered rate-sensitive sectors led the way, with Real Estate (+3.6%) bouncing off its lowest level since Jan-24, Discretionary (+2.2%) lifting off a four-month low and Telcos (+1.9%) catching a bid from a two-year low. Pretty much all the major names in these sectors opened slightly higher and were bid aggressively throughout the day. Taking a step back though, REITs and Telcos have been trading from the top left of your screen to the bottom right, and a strong session like today is just the first step in the bottoming process

• Cast your mind back to late October 2023, when bond yields finally peaked and a rate-sensitive sector like Real Estate surged ~22% between 30-Oct and 14-Dec. But that peak was driven by a genuine softening in CPI and US labour market data, followed by Powell unexpectedly acknowledging in December 2023 that inflation was easing. We may be in the early innings of peak yields, but we're still far from the conditions that set the Oct-23 low

• A long, long list of large caps rallied 4-8% today, but looking out, a lot of these names are down 10-15% over the past month and today is just one abrupt green candle

• Australia CPI rose 4.0% year-on-year in August vs. 4.1% ests and 3.5% in the prior month

  • Headline CPI up 0.4% month-on-month vs 0.5% ests

  • Trimmed mean CPI up 0.2% month-on-month vs 0.3% ests

  • Trimmed mean CPI steady at 3.6% year-on-year vs 3.6% ests

  • Housing was the largest contributor to annual inflation, up 5.7%

  • On a monthly basis, automotive fuel prices soared 14.8% (vs. 7.5% in July) amid higher oil prices and the unwinding of the remainder of the Federal Government fuel excise relief measures

• China's official manufacturing PMI moved back into expansion for the first time in three months

  • Manufacturing PMI rose to 50.1 from 49.8 vs 50.1 ests (in line), ending two straight months of contraction. The new orders sub-index was 50.5 and production was 51.7

  • Non-manufacturing PMI, which covers services and construction, rose to 50.2 from 49.0