Higher-than-expected inflation drove the ASX down sharply on Tuesday as investors braced for a higher interest rate environment.
The benchmark S&P/ASX 200 fell 3.1% before ending the session down 2.5% at 6,950 points – the first close below 7,000 points since May 2021.
Forecasters scrambled to advance their interest rate expectations, while traders sold stocks across all sectors. Stocks do poorly when rates rise because it increases borrowing costs and inflation increases input costs.
Wall Street provided volatile but slightly positive leads, but negative futures weighed on the ASX during Australian trading hours. The volatility index returned to seven-week highs of 29.9 points.
ASX trading volumes were high with more than a billion shares traded, as blue-chip banking and mining stocks slumped. ANZ fell 3.6%, Westpac 2.8% and Commonwealth Bank 2%.
BHP fell 1.3% and Fortescue Metals fell 5% after a trade update. Telstra fell 3% and oil producers Santos and Woodside fell 4.8% and 4% respectively.
“I actually think we’re going to see much higher volatility than everyone thinks,” said Gary Glover of Novus Capital.
“It will probably be difficult for the next two quarters. It’s a real traders market. I don’t think it’s an investor’s market; buy-and-hold will not work here. “
Annual inflation beat expectations at 3.5% for the October-December quarter – the third quarter in a row it was above the Reserve Bank of Australia’s (RBA) target range of 2-3% .
Royal Bank of Canada (RBC) chief economist Su-Lin Ong said Tuesday’s inflation figures “seal the fate of the end of quantitative easing (QE) in February” and that it now expects to see rates rise in August rather than February next year.
But Deutsche Bank economist Phil O’Donoghue said rates could rise as early as May if inflation remains high.
“We previously thought there were enough idiosyncrasies for ‘Australian exceptionalism’ amid the (US Federal Reserve)-led global rush to a rambling cycle,” he wrote in a note to customers.
“Not anymore. Even if Australian price pressures ease somewhat over the next few quarters, we believe the RBA no longer has the luxury of ‘waiting for wage growth’ to ensure the sustainability of the inflation within target Price and wage expectations are now at serious risk of skyrocketing and coming true in an environment of higher inflation.
GSFM adviser Stephen Miller said the Reserve Bank had a lot of work to do to keep inflation under control.
“The RBA stuffed it,” he said during a briefing with reporters, saying the RBA should stop the timeline-based guidelines.
The market was already pricing in four 25 basis point increases this year, according to Miller.