The Australia 200 retreats as US Treasury yields rise post-Moody's downgrade, affecting global markets. Energy stocks dip despite Middle East tensions, while gold miners offer a safe haven amid uncertainty.
Written by
Market Analyst
United States (US) stock markets fell this week as investors adopted a more cautious stance. US bond yields climbed following a weak bond auction and Moody's recent downgrade. The advance of President Trump's tax bill through the House of Representatives added further pressure. The legislation is expected to increase debt by $4 trillion over the next decade if passed by the Senate, contributing to the rise in yields.
Locally, the Australia 200 (ASX 200) received a boost from a dovish 25 basis points (bp) interest rate cut by the Reserve Bank of Australia (RBA). However, gains were limited as surging long-term bond yields pressured interest rate-sensitive sectors. The financials, real estate, and consumer discretionary sectors bore the brunt of this pressure. These three sectors collectively represent about 50% of the Australia 200's weighting, explaining the index's muted response despite the central bank's dovish stance.
Date: Wednesday, 28 May at 9.30am SGT
In the March 2025, headline inflation rose by 0.9%, keeping the annual rate steady at 2.4%. This came in higher than the expected 2.3%. The RBA's preferred measure of inflation, the trimmed mean, rose by 0.7% in the first quarter (Q1) 2025. This allowed the annual rate to fall to 2.9% from 3.3% prior. The monthly CPI indicator for March showed headline inflation rising 2.4% YoY, unchanged from February. The annual trimmed mean inflation measure within the monthly CPI indicator edged up to 2.9% YoY in March from 2.7% in February.
At the RBA's Board meeting earlier this week, the RBA delivered a dovish 25 bp cut to its cash rate to 3.85%. The rate cut was widely expected following the weaker inflation readings outlined above. Both trimmed mean and headline inflation fell back within the RBA's 2% - 3% target range for the first time since the fourth quarter (Q4) of 2021.
The RBA's dovish stance was evident in several ways. The central bank lowered its inflation forecasts and, during the press conference, the RBA Governor acknowledged that a 50 bp cut was considered. The Governor also indicated that the RBA would likely have cut rates even without the Liberation Day fiasco.
Market expectations for the monthly CPI indicator in April point to headline inflation easing to 2.1% from the previous 2.4%. The rates market finished this week pricing in a 60% chance of a 25 bp RBA rate cut in July. A cumulative 67 bp of rate cuts is expected between now and year-end.
Date: Friday, 30 May at 7:50am SGT
This week, Japan's nationwide headline inflation remained steady at 3.6% YoY in April, unchanged from March. However, the core measure of inflation accelerated to 3.5% YoY in April from 3.2% prior. This marked the highest reading since January 2023.
Core inflation, which excludes fresh food and energy, increased to 3% from 2.9% in March. This measure provides insight into underlying price pressures across the economy. The rise in nationwide inflation was anticipated by Tokyo's core CPI reading four weeks earlier. Tokyo's core CPI jumped to 3.4% YoY in April from 2.4% in March, providing a solid indication of the nationwide inflation increase to come.
This month, the Tokyo inflation reading will again be closely monitored. It serves as an early indicator for the nationwide inflation figure, which is released a month later. The preliminary expectation is for Tokyo core CPI in May to ease to 3.3% YoY from 3.4%.
The Bank of Japan (BoJ) has kept its short-term interest rate on hold at 0.50% since January. Markets largely expect a prolonged pause due to several factors. The impact of US tariffs and weakening export demand are key considerations for policymakers. However, persistently strong inflation readings could change this outlook. Such data will likely encourage the BoJ to raise rates again before year-end, despite external headwinds.
Date: Friday, 30 May at 8:30 pm SGT
Last month, the March headline PCE price index rose by 2.3% YoY. This marked the lowest increase in five months but exceeded market expectations of 2.2%. The Fed's preferred measure of inflation, the core PCE price index, increased by 2.6% YoY. This represented a slowdown from the 3% rise in February and marked the smallest gain since March 2021.
Additional details from the report showed robust consumer activity. Personal income grew by 0.5%, while personal spending expanded by 0.7%. Both figures beat expectations, indicating continued consumer resilience.
For the April reading, preliminary expectations point to the headline PCE price index easing to 2.1%. The core measure is expected to remain steady at 2.6% YoY. These forecasts suggest inflation continues its gradual decline towards the Fed's 2% target.
The US rates market reflects cautious optimism about future rate cuts. Markets are pricing in an 80% chance of a 25 bp rate cut in September. A total of 50 bp of rate cuts is priced between now and year-end, indicating expectations for modest monetary policy easing.
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