RBA February preview and what comes next for the ASX 200?

The backdrop

The RBA commenced the current rate hiking cycle in May last year to contain rising inflation and to cool a very tight labour market. Since then, it has delivered a cumulative 325 basis points of rate hikes, including four consecutive 50bp rate rises between July and September.

What is "expected?"

In October, the RBA slowed the pace of its rate hiking cycle and delivered three consecutive 25bp rate hikes into the end of last year. Before last week's hot CPI print, the market was divided as to whether the RBA would raise rates by 25bp in February to a ten-year high of 3.35% or keep rates on hold.

Following a higher-than-expected inflation print last week that saw the annual rate of headline inflation accelerate to 7.8% from 7.3% and core inflation to 6.9% from 6.1%, the market is now almost entirely priced for a 25bp hike, with the door open for a larger 40bp or 50bp rate hike.

The RBA will be reluctant to re-accelerate the pace of rate hikes at this point in the cycle, with the full impact of past rate hikes still to be felt. However, the sharp and broad-based rise in Australian inflation will have unsettled the Board.

More so at a time when the RBA's central bank peers are being rewarded for their earlier and aggressive efforts in cooling inflation and are now moving confidently towards a highly desirable "pause" in their own rate hiking cycles.

The most likely outcome on Tuesday is that the RBA acknowledges it discussed a 50bp rate hike but delivers a 25bp rate. It will likely note that it "expects to increase interest rates further in the period ahead" alluding to another 25bp rate hike in March which would take the cash rate to 3.60%.

Whether the RBA will stop at 3.60% or continues to hike until after it sees the Q1 2023 inflation numbers (released at the end of April) will depend on further evidence emerging of cooling in the labour market and household spending.

How will the ASX 200 react?

The delivery of a hawkish 25bp rate hike by the RBA, will weigh on the ASX 200 but not to the same degree as a larger 40bp or 50bp rise, which could trigger a fall in the order of 1.5%-2%.

After a strong start to the year, the ASX 200 has underperformed in recent sessions as investors switch to global stock markets with a higher percentage of growth stocks than the value-laden ASX 200. Growth stocks are better positioned to benefit from an imminent Fed pause.

Technically the ASX 200 is in overbought territory. There is a five-wave advance from the October 6411 low for the Elliott Wave followers, which warns of a possible pullback.

We continue to favour trimming longs ahead of the bull market 7632 high and looking to either buy a sustained break of the 7632 high or a pullback into the 7200/7000 support area.

ASX 200 daily chart

The figures stated are as of February 3rd, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

Take your position on over 16,000 local and international shares via CFDs – and trade it all seamlessly from the one account. Learn more about trading share CFDs with us, or open an account to get started today.