ASX to fall, weak $A worsens oil pain, rate hike fears

Dr Chalmers warned that while the conflict in the Middle East was adding further uncertainty to petrol prices, its impact would not be seen until the December quarter data is published.

“While inflation is moderating overall, it’s more persistent globally and so it will be more persistent here as well – and we expect to see some of this reflected in the quarterly inflation figures this week,” he said in remarks to the Financial Review.

“Whether it’s global cuts to oil production, the war in Ukraine or the conflict in the Middle East, the challenges coming at us from around the world are being felt around the kitchen tables of hardworking Australians.”

Market highlights

• ASX futures down 65 points or 0.9% to 6846 near 6am AEDT
• AUD +0.1% at US63.20¢
• Bitcoin -1.0% at $US29,912
• Dow -0.9% S&P -1.3% Nasdaq -1.5%
• FTSE -1.3% DAX -1.6% CAC -1.5%
• Gold +0.4% to $US1981.40 an ounce
• Brent oil -0.2% to $US92.16 a barrel
• Iron ore -3.7% to $US112.65 a tonne

Oil shock

RBA governor Michele Bullock said last week she was worried the escalating war between Hamas and Israel could keep inflation and oil prices higher for longer, and indicated a low tolerance for a slower return to target inflation than anticipated.

Israel pounded southern Gaza with air strikes early on Sunday and said it traded fire with Hezbollah in at least four different areas along the Lebanese border. Israel has amassed tanks and troops ahead of a ground invasion with the objective of annihilating Hamas.

Oil prices eased on Friday after the Islamist group released two US hostages from Gaza, leading to hopes the Israeli-Palestinian crisis could be contained. Brent crude futures edged down 0.2 per cent to $US92.16 a barrel and West Texas Intermediate for November delivery dropped 0.7 per cent to $US88.75.

In Australian dollar terms, prices have exploded 35 per cent higher since July 1 as major producers Saudi Arabia and Russia support oil revenues with production controls, with the prospect of Iran becoming embroiled in the Middle East injecting extra volatility into oil markets.

The RBA typically looks through spikes in energy prices, but economists warn that motorists’ budget pressures could influence inflation expectations.

‘Live’ meeting

Australia’s headline and core inflation are forecast to accelerate 1.1 per cent in the September quarter, from June 30, according to a Reuters poll. But on an annual basis, CPI measures are expected to show a cooling with the headline CPI polled at 5.3 per cent, from 6 per cent, and the RBA’s preferred adjusted measure expected to come in at 5 per cent, from 5.9 per cent.

The RBA has kept the cash rate on hold at 4.1 per cent since July.

Bond futures imply just a one-in-three chance of an increase in the cash rate to 4.35 per cent on November 7 but are fully priced for a lift by May. Half of the 42 economists surveyed by The Australian Financial Review still predict an increase this year, most likely at the November meeting.

NAB, Commonwealth Bank and ANZ agreed the RBA’s November meeting was “live”, meaning a high risk of a rate increase.

NAB is the only forecaster among the four majors explicitly calling for a rate rise next month, arguing that core inflation will end the year at 4.3 per cent, above the RBA’s forecast of 3.9 per cent due to elevated rents and stubbornly high services costs.

“If CPI prints in line with our forecast, we think the RBA will upwardly revise their CPI forecasts,” said Alan Oster, chief economist at NAB.

“We expect market services inflation, excluding travel and telco, watched by the RBA as a measure of domestically sensitive inflation, to reach a fresh quarterly and annual high around 7 per cent year-on-year.”

“Given the upside risks to our Q3 23 inflation forecast, we ascribe a 40 per cent chance of a rate hike,” said Gareth Aird, head of Australian economics at CBA.

However, Westpac’s chief economist and former RBA official Luci Ellis said that Wednesday’s CPI figures would have to be “significantly higher” than consensus “to dislodge the RBA board from an unchanged rates decision in November”.

The RBA forecasts core inflation to return to its 2 per cent to 3 per cent target only in late 2025.

Australian shares are set for a sharply lower start, mirroring Wall Street on worries about further interest rate increases by the Federal Reserve, and fear of the Middle East conflict spreading. The Dow Jones Industrial Average fell 0.9 per cent, the S&P 500 1.3 per cent and the Nasdaq Composite 1.5 per cent.

ASX futures indicate a fall of 0.9 per cent or 65 points on Monday, extending last week’s 2.1 per cent decline.

On the US earnings calendar this week are the Magnificent Seven megacap tech stocks – Apple, Alphabet, Amazon, Nvidia, Tesla, Microsoft and Meta Platforms – which have driven nearly all of the S&P 500’s 12 per cent year-to-date gain because of their outsized weighting in the index.

Such an eye-popping run has raised the stakes this earnings season with their valuation trading at an average forward price-to-earnings ratio of 33.5, nearly double the S&P 500’s P/E of 18.3.

On Thursday, the US will release September quarter gross domestic product growth which is tipped to climb to 4.1 per cent at the official annualised rate.

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