The Overnight Report: RBA Rate Hikes On Way

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This story features RIO TINTO LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

US markets traded sideways as the Fed stayed on hold, ahead of big tech earnings.

Meta shares are rallying and Microsoft shares falling after hours.

Yesterday, the Australian market fell on a much higher December quarter CPI print.

ASX200 futures are pointing to a slightly weaker to flat start for Thursday.

Good Morning,

Post a stronger than expected December CPI print, the ASX200 gave up early gains on Wednesday, ultimately closing down -0.1% or -8 points to 8,924.

Technology fell -2.8% and energy rose 2.3% with gold miners continuing to outperform.

What happened overnight, NAB Markets Today Research extract

The main news overnight was the FOMC decision, with the Committee deciding to leave the US policy rate unchanged as expected (target range for the Fed Funds rate 3.5%-3.75%). The decision was not unanimous, with Miran and Waller both voting for a -25bp easing.

The FOMC statement noted the economy was expanding at a “solid pace”, that the unemployment rate had shown “some signs of stabilizing” but that inflation remained “somewhat elevated”.

Although noting that “job gains had remained slow”, the Statement removed any commentary about downside risks to the labour market. Forward guidance was unchanged.

Also overnight was the BoC decision, with the Canadian central bank leaving the policy rate on hold at 2.25% as widely expected.

The BoC Governor noted the Canadian economy was facing considerable uncertainty, and played down recent strength in employment data and the tax-related lift in inflation. There was little market reaction of note to the decision.

It was very quiet on the data front, with no tier one data of note released in the major economies overnight. There was a modest improvement in German consumer confidence in February.

Ahead of the FOMC decision comments from various public officials in both the US and Europe had some impact on FX markets. Yesterday morning Australian time, President Trump got the attention of currency markets when he added to US dollar downside pressure after telling reporters he was not worried about the recent decline in the currency, saying “No, I think it’s great”.

Overnight, Treasury Secretary Bessent has attempted to row back that comment, reaffirming the US always has a strong dollar policy. He added the US is “absolutely not” intervening in dollar-yen.

Bessent’s comment on the Yen has seen USD/JPY recover 0.9% to 153.75, now well up from yesterday’s low of 152.10. 

Commentary wasn’t limited to the USD nor Yen. On the Euro, France’s Villeroy de Galhau said “we are closely monitoring this appreciation of the euro and its possible consequences in terms of lower inflation…this is one of the factors that will guide our monetary policy and our decisions on interest rates over the coming months”.

This followed similar comments by the Austrian central bank Governor earlier in the session. Early this morning, Germany’s Chancellor noted officials were watching the EUR/USD cross “with concern”. EUR is down about -0.7% from the Sydney close to 1.1927, with AUD/EUR just shy of 0.587 this morning.

AUD has been a relative out-performer overnight, with AUD/USD sticking close to the 0.70 level. Firming expectations for a rate hike from the RBA next week have likely supported the currency amid a strong USD dollar backdrop.

Yesterday’s CPI data printed on the high side of expectations, with the annual rates of headline and trimmed mean inflation (3.8% and 3.4%, respectively) above the consensus expectation.

Oil prices (Brent) were up 1.4% in the session, with Brent futures closing above the US$68/bbl level. A refocus on the Iran issue is once again providing some support for oil, with Trump saying “…time is running out” to reach a deal and …the next attack will be far worse!” 

European equity markets finished down overnight, but the moves were small (EuroStoxx50 down -1%). 

December CPI, Westpac extract

The Trimmed Mean came in stronger than expected and as our Chief Economist Luci Ellis has noted, it flags a rate hike by the RBA at the February meeting. Looking ahead the monthly data was bit of a mixed bag.

Seasonally adjusted headline inflation was in line with our year-ended view. Housing-related inflation was more benign than expected with both rent inflation and home-building inflation below our year-ended forecasts. Rent inflation continues to moderate, and the run of monthly data on home-building costs looks like inflation in that category might have peaked.

The headline CPI lifted 0.6% in the December quarter, just a touch above Westpac’s expectation of 0.5%qtr and on par with the market expectations. The annual pace of headline inflation was 3.6%yr up from 3.2% in September and the recent low of 2.1%yr in June.

As has been well documented, the cost-of-living assistance, in particular the energy rebates, have increased the volatility of the headline measure of inflation. They have, however, had a minimal impact on core inflation and so these measures take on a more critical role in assessing the current pace of inflation.

For the December quarter, the Trimmed Mean gained 0.9%, on par with the market and stronger than Westpac’s estimate of 0.7%.

We did note that given our estimate was 0.74% at two decimal places, and so acknowledge upside risk to our estimate, but this is meaningfully stronger than what we had expected and we believe this will tip the RBA over into lifting the cash rate at the February meeting.

CPI too high for too long demands a return to rate hikes, RBC Capital extract

Q4 CPI figures were largely as per consensus, with the quarterly trimmed mean coming in at 0.9%, though on the higher side taking y/y to 3.4%, a touch above survey median of 3.3%.

On the monthly measures, headline printed a bit above expectations (3.8% y/y vs 3.6% RBC/consensus) but trimmed mean was in line at 0.2% m/m, 3.3% y/y. RBA’s quarterly SoMP Nov forecasts were lower at 0.8% q/q, 3.2% y/y on the quarterly trimmed mean.

Looking at some of the details, the biggest quarterly increase in inflation by group was in recreation (up 2.6%), well above our 1.0% forecast. This was driven by a larger than expected 7.1% seasonal lift in domestic holiday travel & accommodation.

On the flip-side, we slightly overestimated alcohol & tobacco and housing inflation with the latter seeing some lower administered prices (electricity & council rates) than we expected.

Food prices lifted a modest 0.4% q/q and clothing prices fell -0.1%. Health detracted from overall CPI, falling -0.5% on lower medical equipment & pharmaceutical prices.

On the full suite of analytical measures, we note an ongoing worrying story on a y/y basis with monthly trimmed mean (up 0.1% to 3.3%), weighted median (up 0.1% to 3.6%), non-tradables (up 0.3% to 4.6%), overall services (up 0.5% to 4.1%), market services ex-vols (up 0.8% to 3.7%) and market goods & services ex vols (up 0.5% to 3.2%) all ticking higher.

We can try to paint a more dovish case by squinting at momentum in some of the key monthly CPI series though. Some core monthly measures eased in Dec including in rents, new dwellings and non-tradables. But the range of quarterly metrics (on top of monthly y/y) tell a different story, with some of the RBA’s key components of interest also continuing to move in the wrong direction – for instance, new dwelling costs lifting from 1.1% q/q to 1.4% q/q.

So to us, the detail of today’s report plus the (RBA’s preferred) quarterly CPI measures such as the trimmed mean together with the broader run of recent economic data (e.g. labour market) suggest the RBA will need to adopt a more restrictive policy stance.

We change our call from an unchanged cash rate profile to two 25bp hikes, one next week (to 3.85%) and a second in May (to 4.10%).

This is only slightly below the recent peak of 4.35% which the RBA held from Nov-23 until Feb-25.

We’re not wedded to timing, but believe the path of least regret is to act sooner rather than later, then go again in May unless Q1-26 CPI shows enough material signs of improvement or the labour market weakens.

Fed pause puts US economy in peril- Nigel Green, deVere extract

The Federal Reserve should have cut rates today (Wednesday), and not doing so puts the US economy at risk.

The US central bank left the federal funds rate target range unchanged at 3.50% to 3.75% at its January policy meeting, extending a pause after three cuts in 2025, even as signs of economic deceleration intensify.

Fresh data underline growing fragility in the US economy.

Keeping rates on hold today is viewed as a policy error that risks tightening financial conditions by default at the very moment the economy is losing momentum. A modest cut would have been prudent risk management, not a retreat from inflation discipline.

Unemployment remains low at 4.4%, but the headline masks a sharp slowdown in hiring. The US added only about 50,000 jobs in December, far below levels needed to absorb population growth. This is a classic low-hire environment that can flip into job losses with little warning. Central banks tend to react too late to labour market turning points.

History teaches us that monetary policy works with long lags. Waiting for payrolls to collapse before acting means easing arrives after the damage has already compounded.

Consumer sentiment is another warning signal. US consumer confidence has dropped to its lowest level since 2014, with households citing anxiety about inflation, jobs, politics, and trade.

Confidence drives spending, credit demand, and housing turnover. When sentiment collapses this sharply, real economic activity usually follows.

Headline inflation ended 2025 in the high-2% range and core inflation is near 3%. Inflation remains elevated, but it’s no longer accelerating. The trajectory matters more than the level, and the trajectory is down.

Policy credibility is often misinterpreted as toughness. Credibility is accuracy. Holding policy too tight as growth cools risks turning restraint into overkill.

Current rates are already close to estimates of neutral. The policy rate is in the 3.5% to 3.75% range, which is not far from neutral according to many models.

Maintaining a restrictive stance in a cooling economy is a recipe for an avoidable downturn and financial conditions are an underappreciated risk.

Markets are pricing fewer than two rate cuts this year. If inflation continues to drift lower while policy stays fixed, real rates rise automatically. That is passive tightening without a single hike.

Failing to cut can be expected to increase the odds the Fed is forced into deeper, faster easing later, after growth and employment have already deteriorated further.

Corporate news in Australia 

-Glencore directors have reported “skin in the game” amid the Rio Tinto ((RIO)) talks

-Blackstone delays Iress ((IRE)) buyout due to a price and earnings review

-Smartgroup ((SIQ)) is looking at a scrip merger with FleetPartners Group ((FPR)) amidst private equity interest

-Energy Transition Materials ((ETM)) is seeking $20m for a Nasdaq listing

-Koala is readying for $400m IPO stressing growth beyond mattresses

-Rokt rules out IPO in 2026 due to AI anxiety in public markets

On the calendar today:

-NZ ANZ Jan Business Survey

-US Nov Trade Balance

-US Nov Wholesale Trade

-US Weekly Jobless Claims

-AERIS RESOURCES LIMITED ((AIS)) Dec Qtr Activity

-ARAFURA RARE EARTHS LIMITED ((ARU)) Dec Qtr Activity

-BETR ENTERTAINMENT LIMITED ((BBT)) Dec Qtr Update

-BLACK PEARL GROUP LIMITED ((BPG)) Dec Qtr Update

-IGO LIMITED ((IGO)) Dec Qtr Activity

-IKEGPS GROUP LIMITED ((IKE)) Dec Qtr Activity

-ILUKA RESOURCES LIMITED ((ILU)) Dec Qtr Activity

-IMPEDIMED LIMITED ((IPD)) Dec Qtr Activity

-LIONTOWN LIMITED ((LTR)) Dec Qtr Activity

-MINERAL RESOURCES LIMITED ((MIN)) Dec Qtr Activity

-MP Dec Qtr Update

-MAYNE PHARMA GROUP LIMITED ((MYX)) AGM

-NICKEL INDUSTRIES LIMITED ((NIC)) Dec Qtr Activity

-PERSEUS MINING LIMITED ((PRU)) Dec Qtr Activity

-RAMELIUS RESOURCES LIMITED ((RMS)) Dec Qtr Activity

-VIVA ENERGY GROUP LIMITED ((VEA)) Dec Qtr Activity

-WHITEHAVEN COAL LIMITED ((WHC)) Dec Qtr Activity

-WISR LIMITED ((WZR)) Dec Qtr Update

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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