Strong AU inflation print tempers surging rally in the ASX 200

After a lacklustre day yesterday, with a summer holiday-type feel, the ASX 200 surged to a four-week high today, tempered only by a larger-than-expected rise in Australian inflation.

Today’s rise in the ASX 200 followed gains on Wall Street and in commodity markets as traders continued to position for China’s reopening. The rally in the local equity market was also supported by a larger-than-expected gain in retail sales (1.4% vs 0.6% expected) in November, boosted by Black Friday sales.

The key details within the inflation report:

• Headline inflation for November rose to 7.3% Y/Y, above market consensus for a 7.2% rise, to its equivalent highest level in 32 years. The Reserve Bank of Australia (RBA) expects inflation to rise to 8% by the end of this year. The less volatile trimmed mean printed at 5.6%, slightly ahead of consensus expectations of 5.5%
• The most significant price rises were housing (+9.6 per cent), food and non-alcoholic beverages (+9.4 per cent), transport (+9.0 per cent), furniture, household equipment and services (+8.4 per cent) and recreation and culture (+5.8 per cent)
• The rise in housing was driven by a rise in new dwelling prices as builders passed through higher costs for labour and materials. Rent prices increased further this month from an annual rise of 3.5% in October to 3.6% in November, reflecting a tight rental market
• The main contributor to the rise in food prices was a rise in the price of meals eaten out and takeaway foods, which rose 7.3% due to rising input costs, fresh food supply issues and labour shortages
• Fruit and vegetable prices rose 9.5% in the year to November and continue to be impacted by flooding, heavy rainfall and hail in key growing areas, alongside high transport and fertiliser costs
• The restoration of the Australian Governments Fuel Exercise at the end of September contributed to higher petrol prices in October and early November. This trend should be reversed next month as petrol prices fell ~22c at the end of November.

What was been the impact on the ASX 200?

Inflation remains well above the RBA’s target range of 2-3%, and this morning’s hotter-than-expected inflation number is a step in the wrong direction, increasing the probability of a 25bp RBA rate hike in February to above 70%.

Nonetheless, the ASX 200 is currently being supported by the tailwinds outlined above, with one of the day’s highlights being fresh all-time highs at $48.87 in the Big Australian BHP as the price of iron ore climbed above $120p/t.

What do the charts say?

Providing the ASX 200 remains above the 200-day moving average at 7000 and last week’s 6905 low, the view remains that the pullback from the 7375 high is a correction rather than a reversal lower.

The positive view is strengthened by the ASX 200's break above the downtrend coming from the 7375 high and implies the ASX 200 will trade above the December 2022 7375 high in the coming weeks.

ASX 200 daily chart

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