STIR: $-Bloc Markets Soften Sharply, Outside NZ, Over the Past Week

Q4 CPI measures printed 0.1pp below consensus with underlying measures trending towards the top of the RBA’s 2-3% band but still “some way” from the 2.5% mid-point. The data should increase the RBA’s “confidence that inflation is moving sustainably towards target” as annual rates printed 0.2pp below its November forecasts. There will be updated projections at its February 18 meeting and the timing of 2.5% trimmed mean inflation will be important for its decision. 

Australia CPI y/y%

Source: MNI - Market News/Refinitiv/ABS

• The lower-than-expected Q4 outcome is likely to bring down near-term inflation forecasts but the labour market remains tight with its moderation having stalled, the AUD is softer and productivity growth remains very weak. These other factors may result in the target mid-point still only achieved in mid- to late-2026 and a rate cut pushed out into Q2.
• Q4 trimmed mean inflation rose 0.5% q/q driving a moderation in the annual rate to 3.2% from an upwardly-revised 3.6% in Q3. It excluded electricity and fuel prices and the increase was driven by recreation while housing (new dwellings -0.2% q/q) helped to offset it.
• Services inflation moderated to 4.3% y/y in Q4 from 4.6% but is still elevated and in line with the trend since Q4 2023. It appears to still be moving sideways, while core services picked up 0.1pp to 4.2% y/y and rose 1.1% q/q and continues to prove sticky. The ABS said that rents, medical & hospital services and insurance are keeping services high.
• The RBA noted in the December minutes that “underlying inflation was still too high, underpinned by persistently high services price inflation”. Q4 data hasn’t improved this.
• The ABS noted that without the government’s electricity rebates, prices would have risen 0.2% q/q compared to the 9.9% q/q drop recorded.

Australia services CPI y/y%

Source: MNI - Market News/Refinitiv/ABS

The Australian 3/10 cash curve is hovering near its steepest level since early January and above the upper range it had traded in since late 2022.

• The steepening of the Australian curve has coincided with the recent downward movement in the 3-year yield.
• The 3-year yield is down 30bps since mid-January as RBA easing expectations have gathered momentum.
• RBA-dated OIS pricing is 4-7bps softer across meetings after today’s Q4 CPI data.
• A 25bp rate cut is more than fully priced for April (135%), with the probability of a February cut at 91% (based on an effective cash rate of 4.34%). February was at 76% before the data. 

Figure 1: AU 3/10 Yield Curve (%) Vs. 3-Year ACGB Yield (%) 

Source: Bloomberg / MNI - Market News

Asian equities are higher this morning, following Wall Street’s tech-led rebound after a sharp selloff. Japan and Australia led gains, while most regional markets were closed for Lunar New Year. The recovery came as Nvidia surged 8.9%, easing concerns over AI-driven valuations that had rattled investors earlier in the week. Australian inflation data showed a sharper-than-expected slowdown, pushing the Australian dollar lower and fueling bets on RBA rate cuts. 

• Japan's TOPIX is up 0.35%, while the Nikkei is 0.50% higher. Australia's ASX 200 is 0.80% higher and New Zealand's NZX 50 is 0.10% higher.
• US equity futures are slightly lower this morning after the NASDAQ jumped 2% overnight, while the S&P 500 close 0.90% higher.
• Markets are watching the Fed's rate decision on Wednesday, where rates are expected to remain unchanged but Powell’s guidance on a possible March cut will be key. Major US tech earnings from Tesla, Microsoft, and Meta are due the same day, followed by Apple on Thursday. The ECB will also announce its policy decision on Thursday, alongside Eurozone GDP and unemployment data. Other notable releases include US Q4 GDP (Thursday), PCE inflation, and employment cost index (Friday), which will shape expectations for Fed policy in 2025.