The next 48 hours could be pivotal for ASX 200 shares after the latest quarterly consumer price index (CPI) data was released today. The CPI represents the level of inflation in the economy, with a high CPI indicating high inflation.
As investors anxiously await the outcome of the US Federal Reserve's policy meeting — scheduled for 4.30am AEST on Thursday — the S&P/ASX 200 Index (ASX: XJO) is also on high alert.
However, the ASX 200 has advanced more than 1% into the green today as inflation broadly fell in line with expectations.
Let's take a closer look.
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Quarterly inflation and market reaction
According to the Australian Bureau of Statistics (ABS.), CPI held steady at 1% in the three months through June, mirroring the previous quarter.
This suggests inflation may have moved back into more predictable territory.
Meanwhile, over the 12 months, trimmed CPI fell to 3.9% from 4%. This was against consensus expectations of 4%, showing an improvement there. The ASX 200 has responded accordingly.
The CPI data is crucial as it informs the RBA's decision on monetary policy and interest rates next week.
The RBA is mandated to keep inflation within a 2-3% band and uses monetary policy tools to do so. Trimmed CPI is the RBA's preferred measure of inflation.
Andrew Lilley, a rate strategist at Barrenjoey, points out that investors are confused about the RBA's next move.
"It's an extremely confusing junction for investors," he told The Australian Financial Review. Lilley also noted a quarterly CPI reading of 1.1% could make next week's RBA meeting "live" for a possible rate increase.
The next 48 hours: critical for the ASX 200
After today's CPI read, the next 48 hours are shaping up to be among the most important of the year for the ASX 200, many experts say.
Nervous investors are bracing for the outcome of the US Federal Reserve's policy meeting, which is due early Thursday morning Australian time.
Any signals from the Fed about future rate cuts – or hikes – could significantly impact markets.
Barrenjoey's Andrew Lilley also warns that any deviation from expectations could be the "biggest shock" for the ASX 200.
Before the inflation data, bond traders were pricing in around a 20% chance that the RBA would lift the cash rate to 4.6% next Tuesday and a 31% chance at the next policy meeting in late September, according to the AFR.
It will be interesting to see their projections now, with inflation falling towards target.
Meanwhile, economist Warren Hogan, an adviser to Judo Bank, described the situation as highly volatile.
Markets are on a knife edge, maybe that's not even the right term, it's almost like they're a box of firecrackers.
There's a lot of potential for volatility, which seems to be picking up.
Hogan also notes the timing of the US election and the support for US Vice President Kamala Harris as factors that markets may have not yet fully considered.
He suggested that the Fed might avoid making bold moves ahead of the election, which could surprise the markets.
Either way, the next few days – and next week – appear crucial for the ASX 200.
Foolish takeout
For ASX 200 investors, the intersection of local and international economic events isn't always ideal. As such, the next two days will be critical in determining the market's mid-term direction.
The focus remains on the CPI data and subsequent RBA decision, with broader global economic signals also playing a crucial role.
As always, longer-term thinking is critical in investing.
