• S&P/ASX 200 Index exceeds closing high set in August 2021
  • Bonds jump with stocks, currency falls after CPI data

Australia’s equity benchmark surged alongside bonds, closing at an all-time high after inflation data bolstered bets for monetary policy easing.

The S&P/ASX 200 Index rallied 1.1% to close at 7,680.70 on Wednesday, surpassing its previous peak set in August 2021. The milestone comes after the nation’s headline inflation cooled further in the final three months of 2023, cementing the case for the Reserve Bank to keep interest rates unchanged next week.

“Today’s cooling CPI effectively closes the door for RBA’s further hike, which unofficially claims the end of our years-long tightening journey,” said Hebe Chen, an analyst at IG Markets. “Whether or not the ASX could keep the momentum will largely depend on external factors including the Federal Reserve’s easing prospect and China’s commitment for economic support.”

Global equity markets have been propelled by signs that inflation has peaked and central banks may be done hiking. Soft inflation data on the back of weak retail sales figures on Tuesday in Australia reinforces expectations the RBA may embark on an easing cycle as soon as June.

Money market pricing is now implying a 80% chance of a reduction that month, and fully pricing an August cut.

The currency and bond yields dropped following the inflation data. Yields are falling back from multi-year highs as traders grow more convinced the days of interest-rate hikes from the RBA are over.

“The market strength has been driven by the optimism for the rates cycle turning, more than fundamentals improving,” said Anna Milne, an analyst at Wilson Asset Management. Miners have been supported by renewed stimulus expectations in China, while banks “benefit from the global ‘soft landing’ narrative.” Both sectors make up more than half of the country’s benchmark.

The local index has so far this year outperformed a regional gauge of stocks, which has been weighed by a continued selloff in Chinese equities. Still, the gains in Australian shares lag that of the S&P 500 Index on a year-to-date basis as speculation that the Fed will start cutting rates this year boosts the outlook for US companies.

With Australian share prices having “run up so hard over the last few months, considerable pressure is now on earnings in February to justify valuations,” UBS AG analyst Richard Schellbach wrote in a note dated Jan. 30.

Written by:  — With assistance from Michael G Wilson @Bloomberg

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