Ahead of the game: 17 February 2025

US stock gains and RBA outlook drive ASX 200 higher

United States (US) stock markets rose this week, driven by gains in technology stocks, hopes for a delay in new US tariffs, and elements within the producer price index (PPI) that helped alleviate inflation concerns.

Locally, the ASX 200 finished the week at a new record high above 8600. This record was achieved on the back of a solid start to earnings season, with more companies exceeding expectations and fewer disappointments than usual. Additionally, there are expectations that the Reserve Bank of Australia (RBA) will commence a interest rate-cutting cycle next week.

The week that was: highlights

• In the US, Federal Reserve (Fed) Chair Jerome Powell reiterated that the Fed did ‘not need to be in a hurry to adjust our policy stance,’ pointing to a strong economy and inflation consistently above the 2% target
• US headline inflation increased in January by 0.5% month-over-month (MoM), marking the largest monthly gain since August 2023. On an annual basis, headline inflation rose by 3% versus the 2.9% expected
• Meanwhile, core inflation increased by 0.4% MoM versus the 0.3% expected, marking its fastest rise since March last year. In annual terms, core inflation edged up to 3.3% in January from 3.2% prior
• Producer price inflation was hotter than expected in January at 0.4% versus 0.3% expected
• Initial jobless claims fell by 7000 to 213,000 last week, below market expectations of 215,000
• In the United Kingdom (UK), fourth quarter (Q4) gross domestic product (GDP) grew by 0.1% versus -0.1% expected
• In the European Union (EU), industrial production fell by 1.1% in December compared with market expectations of a 0.6% decline
• In Australia (AU), Westpac Consumer Confidence increased by 0.1% to 92.2 in February
• The National Australia Bank (NAB) Business Confidence index for January rose to 4 from -2 prior
• Home loans increased by 4.2% quarter-over-quarter (QoQ) in Q4 from 3.5% prior
• Crude oil snapped a three-week losing streak to gain 0.63% to $71.45
• Gold hit a fresh record high of $2942
• Bitcoin trades flat at $96,411
• Wall Street's gauge of fear, the volatility index (VIX), eased to 15.09 from 16.55.

Key dates for the week ahead

Australia & New Zealand

• AU: RBA interest rate decision (Tuesday, 18 February at 2.30pm AEDT)
• AU: RBA media conference (Tuesday, 18 February at 3.30pm AEDT)
• NZ: Reserve Bank of New Zealand (RBNZ) interest rate decision (Wednesday, 19 February at 12.00pm AEDT)
• AU: Employment (Thursday, 20 February at 11.30am AEDT)

China & Japan

• JP: GDP fourth quarter (Q4) (Monday, 17 February at 10.50am AEDT)
• JP: Inflation rate (Friday, 21 February at 10.30am AEDT)

United States

• US: Building permits (Thursday, 20 February at 12.30am AEDT)
• US: Housing starts (Thursday, 20 February at 12.30am AEDT)
• US: Federal Open Market Committee (FOMC) meeting minutes (Thursday, 20 February at 6.00am AEDT)
• US: Existing home sales (Saturday, 22 February at 2.00am AEDT)

Europe & United Kingdom

• UK: Employment (Tuesday, 18 February at 6.00pm AEDT)
• UK: Inflation rate (Wednesday, 19 February at 6.00pm AEDT)
• UK: Consumer confidence (Friday, 21 February at 11.01am AEDT)
• UK: Retail sales (Friday, 21 February at 6.00pm AEDT)
• UK: Standard & Poor's (S&P) purchasing managers' index (PMIs) (Friday, 21 February at 8.30pm AEDT)

Key events for the week ahead

• JP

GDP Q4

Monday, 17 February at 10.50am AEDT

Japan’s third quarter (Q3) GDP was previously revised up to 1.2% from the initial 0.9%, as stronger-than-expected capital investment and exports helped offset weaker consumption and boosted overall growth.

Looking ahead, Japan’s Q4 GDP is expected to moderate to a 1.0% annualised QoQ increase, easing from the 1.2% in the Q3. Consumption may remain the weak spot, with projections for the component to contract by 0.3% QoQ, while capital expenditure (+1.0%) and exports (+0.4%) are expected to remain the bright spots.

Policymakers will closely monitor the GDP data to assess the scope for further rate hikes. So far, they have relayed some caution regarding consumer spending amid persistent cost pressures. Any signs of weaker growth could keep policymakers more guarded on the timing of the next rate hike.

GDP growth annualised chart

• AU

RBA interest rate decision

Tuesday, 18 February at 2.30pm AEDT

At its December meeting, the RBA kept its Official Cash rate on hold at 4.35% for a ninth consecutive meeting. A dovish shift in tone was noted in the statement that accompanied the ‘on hold’ decision.

‘Wage pressures have eased more than expected in the November SMP’ and ‘some of the upside risks to inflation appear to have eased.’

The minutes from the December Board meeting confirmed the RBA’s dovish pivot.

‘If the future flow of data continued to evolve in line with, or weaker than, their expectations, it would further increase their confidence that inflation was declining sustainably towards target. If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness.’

The all-important Q4 inflation update released in late January was cooler than expected by the RBA and the market.

Headline inflation rose by 0.2% over the quarter allowing the annual rate of headline inflation to ease to 2.4% from 2.8%. The RBA’s preferred measure of inflation, the trimmed mean, rose by 0.5% in the quarter, allowing the annual rate of core inflation to fall to 3.2% from 3.6% prior - for an eighth quarter of lower annual trimmed mean inflation.

Following the RBA’s dovish pivot and a cooler Q4 inflation reading amid sluggish growth, it is widely anticipated that the RBA will reduce the Cash rate by 25 basis points (bp) to 3.85% at next week's board meeting. This would mark the RBA's first rate cut since November 2020. A second 25 bp rate cut is fully priced for May.

The RBA’s updated forecasts are expected to show lower near-term inflation and slower labour market progress and continue to show a GDP recovery as real disposable incomes begin to rise and inflation decreases.

RBA Official Cash rate chart

• US

FOMC meeting minutes

Thursday, 20 February at 6.00am AEDT

At its meeting in late January, the Fed kept the Fed Funds target rate unchanged at 4.25% - 4.50%, as widely expected.

The Fed noted that growth remained steady and that the labour market was stable at strong levels but omitted previous mentions of progress on reducing inflation.

Fed Chair Powell said in his testimony this week that the Fed is in no hurry to cut rates again. We expect to see this point contained in the minutes, along with a desire to await further inflation and jobs data and clarity on the impact of President Donald Trump’s policies.

Following this week's warmer US consumer price index (CPI) reading, the US rates market is pricing in 33 bp of Fed rate cuts this year, less than the 50 bp of Fed rate cuts that were priced this time last week.

Fed Funds rate chart

• JP

Inflation

Friday, 21 February at 10.30am AEDT

Inflationary pressures in Japan have intensified in recent months, with headline inflation reaching 3.6% in December - the highest since January 2023. Core inflation also climbed to a 19-month high of 3.0%, while strong wage growth data offers conviction that inflation around the Bank of Japan’s (BoJ) 2% target can be sustained.

Japan’s average cash earnings surged 4.8% year-over-year (YoY) in December and further wage momentum is expected in the upcoming Shunto negotiations to reinforce expectations for a rate hike.

Tokyo’s inflation, often a leading indicator for nationwide trends, sped to 3.4% in January from the previous 3.0%, marking its third straight month of increases. This reflects upside risks to the upcoming nationwide data, with any stronger-than-expected inflation print likely to bring forward rate hike expectations and support the Japanese yen. Currently, markets are leaning towards a 25 bp hike in the September meeting.

JP inflation rate chart

• US

Q4 2024 earnings

The US Q4 2024 earnings season continues, with reports set to drop next week from companies including TripAdvisor, Dropbox, Rivian, and Walmart.

US Q4 2024 earnings chart