ASX 200 jumps 0.77% as decline in core inflations sparks rate cut hopes

Image Source : Krish Capital Pty Ltd

Index Update: The S&P/ASX 200 closed higher on Wednesday, gaining 64.00 points 0.77% to close at 8,349.10 as a decline in monthly core monthly inflation boosted expectations that the Reserve Bank of Australia could cut interest rates as soon as next month. Notably, the index has risen for four days straight. Over the week, the S&P/ASX 200 rose by 2.33% and is currently 1.94% below its 52-week high. The Australian benchmark index reversed from early morning drop of 0.1% as the Australian Bureau of Statistics (ABS) released the November Australian inflation data. Six sectors ended in the green, with the materials sector recording the maximum gain of 1.61%. Meanwhile, the information technology sector recorded the highest drop of nearly 0.82%.

Macro Update: The data released by the ABS on Wednesday highlighted that in November, the Reserve Bank of Australia’s preferred measure of inflation, the "trimmed mean" or underlying inflation, decreased from 3.5% in October to 3.2%. While this figure remains above the RBA’s target range, it signals that inflation is cooling, strengthening the argument for the central bank to reduce interest rates for the first time in over a year when it meets on 17-18 February.

Meanwhile, the consumer price index figures for the 12 months to November showed the headline inflation rate rose to 2.3% from 2.1% in the 12 months to October, partly driven by the timing of government electricity rebates reaching households. Investors are awaiting the quarterly inflation data for December, due to be released on 29 January.

Top Market Movers: In today’s trading, Bellevue Gold Limited (ASX: BGL) was the top gainer, rising by 7.07%, followed by Regis Resources Limited (ASX: RRL) with a 5.02% increase. The Star Entertainment Group Limited (ASX: SGR) came in third with a 5% gain. On the downside, Deep Yellow Limited (ASX: DYL) experienced the largest decline, falling by 6.69%, followed by Zip Co Limited (ASX: ZIP) with a 5.18% decrease. HMC Capital Limited (ASX: HMC) saw a notable drop of 4.44%, marking the third-largest decline.

Commodity Update: The U.S. dollar strengthened on Wednesday, while the Japanese yen weakened near levels that prompted intervention last year, following strong U.S. economic data that pushed yields higher and reduced expectations for Federal Reserve rate cuts. In commodity markets, gold slipped 0.10% to $2,662.90, while silver rose 0.08% to $30.71. Copper saw a slight gain of 0.25%, reaching $9,008.50. Brent crude oil increased 0.42%, closing at $77.37 per barrel, driven by tighter supplies from Russia and OPEC, and a surprise rise in U.S. job openings, signalling economic growth and higher oil demand. Markets await upcoming payroll data for clarity on rate decisions.

Our stance: The S&P/ASX 200 closed 0.77% higher on Wednesday, reversing an early morning dip. The turnaround came after the latest ABS data revealed core inflation in November fell to 3.2% from 3.5% in October. Meanwhile, job vacancies increased for the first time in two years, making a case for interest rate cut. Market experts now see a 68% chance of a rate cut in February, up from a 60% chance earlier. The latest data suggest the Australian economy continues to disinflate gradually with the jobs market remaining strong.

The recent performance of the S&P/ASX 200 Index reflects a combination of short-term caution and long-term strength, offering insights into the market's current dynamics. On the short-term front, the index gained 64.00 points, with a bullish candlestick formation and strong trading volumes, indicating that investor confidence is still intact. This upward movement, supported by healthy trading activity, suggests that market participants remain optimistic despite potential short-term volatility. Furthermore, the index's position above the 21-period Simple Moving Average (SMA) offers technical support in the near term, providing a signal that the market retains some degree of upward momentum. For this bullish momentum to extend further, the index will need to break through the critical resistance level of 8,365.40. A breakout above this level would likely trigger additional buying interest and confirm that the market's current upward trend is sustainable, opening the door for more positive price action in the near future. From a longer-term perspective, the index's position above the 50-period SMA on the weekly chart suggests that the broader market trend remains healthy.