The latest consumer price index (CPI) inflation figures released by the Australian Bureau of Statistics (ABS) today seem to have had an especially warm welcome from ASX investors.
Before the release of the data at 11:30 am this morning, the S&P/ASX 200 Index (ASX: XJO) was having a rather dull day. But upon these figures' arrival in the public arena, the ASX 200 jumped on a rocket ship. The index rapidly gained 0.7%, and is now up a pleasing 1% at back over 7,400 points.
As we covered this morning, these latest figures certainly contain plenty of good news. Inflation continues to cool across the Australian economy. The three months ending 30 June saw quarterly inflation come in at 0.8%. That brings down annual inflation from 7% at the end of the March quarter to 6% as of 30 June.
ASX investors are probably reacting so positively because they are now assuming these latest inflation figures will stay the Reserve Bank of Australia (RBA)'s hand at its upcoming August meeting.
Does the latest Australian inflation data herald the end of interest rate rises?
We can see this reflected in the bond markets. As reported in the Australian Financial Review (AFR) this morning, before today's CPI data was released, bond futures had priced in a 54% chance that the RBA would raise interest rates again at its upcoming August meeting.
But since this latest inflation data was released this morning, these odds have tanked to 29%.
In fact, bond investors are now predicting that peak interest rates are in sight. The markets are now pricing in a peak cash rate of 4.35%, down from 4.44% this morning. That's less than one full interest rate hike away, seeing as the cash rate is currently at 4.1%.
This view is also shared by CreditorWatch's Chief Economist, Anneke Thompson.
Thompson had this to say on today's CPI data and what it could mean for interest rates:
Today's inflation rate came in at below market expectations, with particular progress made in the slowing rate of goods inflation… Goods inflation is far more responsive to monetary policy changes than services inflation, and this shows that consumers have well and truly responded to the RBA's tightening measures.
Services inflation is still increasing… [but] further increases to the cash rate are going to have limited impact on price growth in these areas, and it is likely that the RBA board will take this into consideration at their meeting in August…
This result has reduced the chance of a further cash rate rise at the August meeting. It now seems that Labour Force data will become more crucial to the RBA's decision making. The board will be hoping to see some softening in unemployment rate, to reduce the chance of further pressure on wages.
So it's perhaps no wonder the ASX 200 is reacting so positively to this latest economic news today. No doubt mortgage holders will be experiencing a similar reaction at home too, thanks to the prospect of the end of interest rate rises.
