Australia's Equities Edge Higher Amid Anticipation of Cooling Inflation

The Australian equity market has been on a steady climb in the lead-up to the April 30 release of the March quarter Consumer Price Index (CPI), with investors betting that easing inflation will pave the way for a dovish turn in monetary policy. As the Reserve Bank of Australia (RBA) faces mounting pressure to pause or reverse its recent rate hikes, shares in interest-rate sensitive sectors like real estate and consumer discretionary are surging ahead of the data. But is this optimism justified, and what risks lurk beneath the surface?

The Inflation Crossroads

Australia’s inflation has cooled to 2.2% year-over-year in the March quarter, according to forecasts, down from 2.4% in February. This would mark the lowest reading since the RBA’s 2-3% target range was established, creating a pivotal moment for policymakers. The April 30 CPI release will likely confirm whether this trend is durable, with the RBA signaling a readiness to cut rates if inflation remains subdued.

Investors are pricing in a 50% probability of a rate cut by year-end, according to futures markets. This has already buoyed the ASX 200, which has risen 8% since December—a stark contrast to global peers like the S&P 500, which has been flat. The real estate sector, which is highly sensitive to borrowing costs, has led the charge, climbing 14% year-to-date.

The Trade War Wildcard

While domestic data is front and center, Australia’s exposure to global trade tensions complicates the outlook. The U.S.-China standoff has disrupted supply chains for key exports like iron ore and liquefied natural gas, creating deflationary pressures in certain sectors. For instance, the price of iron ore—a critical input for China’s steel industry—has fallen 18% since early 2024, squeezing profits for miners like BHP and Rio Tinto.

Yet this is a double-edged sword. Cheaper raw materials could lower input costs for manufacturers, indirectly supporting corporate margins. The ABS’s monthly CPI indicators for February and March showed a 0.2% decline in tradable goods prices, suggesting global deflationary forces are already at work.

The RBA’s Delicate Balancing Act

The RBA’s challenge lies in navigating this mixed picture. While headline inflation is on track to meet its target, core measures like the Trimmed Mean CPI—a favorite metric for policymakers—remain stubbornly elevated at 2.7%. This could force the bank to maintain its hawkish tone even as headline figures ease.

“Markets are getting ahead of themselves,” said Jane Hume, an economist at Macquarie Group. “The RBA won’t cut rates until they’re confident inflation is sustainably within target. That could take until 2026.”

Sector Winners and Losers

The equity market’s optimism is unevenly distributed. Consumer discretionary stocks, such as retail giant Wesfarmers and travel companies like Webjet, have surged on hopes of a consumer rebound. Meanwhile, financials—a traditional beneficiary of rising rates—have lagged, with Commonwealth Bank shares down 5% this year.

The energy sector, however, faces headwinds. Lower oil prices and the transition to renewables have pressured companies like Woodside Energy, whose shares have dipped 12% since January.

Risks Ahead

Investors betting on a CPI-driven rally must contend with two critical risks. First, a hotter-than-expected print could force the RBA to delay easing, triggering a sharp sell-off. Second, the global trade environment remains volatile. A sudden escalation in U.S.-China tariffs, for instance, could reignite inflation through higher import costs.

The June quarter CPI release on July 30 will also be critical. If inflation ticks upward between April and July, the RBA’s hands will be tied.

Conclusion: A Precarious Rally

Australia’s equity market is pricing in a best-case scenario: a soft CPI print in April followed by steady easing through 2025. But with core inflation still above target and global trade dynamics uncertain, this optimism may be premature.

Historical data suggests that equity markets typically rise in the 30 days following an RBA rate cut—gaining an average of 4.2%—but only when inflation is clearly under control. With the March CPI forecast to hit 2.2%, the conditions appear ripe for a near-term rally. However, investors should remain cautious: the path to sustained growth hinges on the RBA’s ability to balance cooling inflation with avoiding an abrupt slowdown in economic activity.

As the saying goes, markets climb a wall of worry—and Australia’s current rally is no exception. The next few weeks will determine whether this optimism is justified or merely a fleeting hope.