Australian investors are preparing for potential market shifts this Monday, initially influenced by expectations of a dip. ASX futures, which closed Saturday, had indicated a 0.7 per cent fall for the S&P/ASX 200 at opening. However, a late Sunday post from US President Donald Trump on Truth Social, stating an agreement was largely negotiated between the US, Iran, and other countries to end the war and reopen the vital Strait of Hormuz, has introduced fresh uncertainty. This announcement is anticipated to trigger a fall in oil prices and temporarily ease anxiety in bond markets, where yields had recently surged to decade-highs on inflation concerns linked to the Middle East conflict.
Despite the optimistic announcement, investment strategists remain sceptical about the prospects of a lasting peace deal, highlighting unresolved issues such as Iran’s nuclear program, sanctions relief, and the administration of the Strait of Hormuz. Perpetual’s head of investment strategy, Matthew Sherwood, noted that markets often react to such claims despite a history of unfulfilled expectations. Domestically, traders will gain crucial insights into inflation pressures with the release of monthly consumer price figures on Wednesday. Economists forecast annual headline inflation to ease to 4.4 per cent in April, down from March’s 4.6 per cent. However, core inflation, the Reserve Bank of Australia’s preferred measure, is expected to tick higher to 3.4 per cent.
Westpac chief economist Luci Ellis emphasised that April’s inflation report would be key in assessing whether broader cost pass-throughs are widening. Concerns over inflation and government spending recently pushed Australia’s 10-year bond yield to 5.1 per cent, nearing 2011 highs. Yet, yields pulled back after a surprise jump in the unemployment rate, impacting RBA rate expectations. Money markets now imply only a tiny chance of a June rate hike, with a 95 per cent probability by Christmas. This is a significant shift from earlier pricing of a June increase to 4.6 per cent. Sherwood warned that a “bad inflation report this week will lead to a bond and equity market sell-off, but a better report probably won’t do much.”
