Australia’s TD-MI Inflation Gauge slipped into contraction in May, dropping to -0.3% month on month from 0.6% previously. The reading points to easing price pressures over the month.
The gauge’s reversal may influence expectations for near-term inflation momentum. It follows a firmer April print, but May’s decline indicates a softer monthly profile for consumer prices.
Cooling Price Pressures and Market Implications
Given the surprise drop in the TD-MI inflation gauge to -0.3% for May, we see this as a significant signal of cooling price pressures. This data sharply reduces the probability of any further interest rate hikes from the Reserve Bank of Australia (RBA). We believe the market will now begin to more seriously price in the timing of a first rate cut.
We anticipate this will put downward pressure on Australian bond yields in the coming weeks. The Overnight Index Swap (OIS) market is already shifting, now pricing in a 45% chance of an RBA rate cut by December 2026, a sharp increase from 15% just last week. Consequently, we are looking to add to long positions in 3-year and 10-year government bond futures.
This shift in interest rate expectations should weaken the Australian dollar. The AUD/USD, which has been hovering around 0.6620, is now vulnerable to a drop as the yield advantage over the US dollar diminishes. We are considering buying AUD/USD put options with a strike price around 0.6550 as a way to position for this expected move.
Impacts on Equities and the Outlook for Official CPI
For equities, the prospect of lower rates is a positive catalyst, especially for rate-sensitive sectors. We expect the ASX 200 to find support, with potential for an upward trend to develop. We are looking at call options on the index or long positions in ASX 200 futures to capitalize on this sentiment.
However, we must be cautious as this is just one private survey. The most recent official quarterly CPI from the Australian Bureau of Statistics showed inflation was still stubbornly high at 3.6% annually. The RBA will need to see this cooling trend confirmed in official data, like the upcoming monthly CPI indicator, before altering its stance.
