The dollar has flown upwards, unemployment has taken an unexpected fall to 4.2%, and bets are growing that Australian interest rate hikes are set to rise.
All of which leaves the inflation numbers due out this coming Wednesday as the final domino to fall before an official interest rate hike arrives in either February or possibly March.
Interestingly, the RBA Board doesn’t meet for an interest rate determination in April, so if rates are going to rise, February and March are the two main options.
So, what should investors and traders watch out for when the Australian Bureau of Statistics releases its inflation numbers at about 11.30 am on Wednesday?
Well, the number that the Reserve Bank Board will have their eyes on is for trimmed mean inflation.
The Magic Number
Economists are virtually united on the magic number for the trimmed mean will be 3.2%.
Anything above that number and the chances of a rate hike when the RBA meets on February 2-3 will grow even further.
Anything at or below should be enough for the board to hold rates steady – at least until March and possibly longer.
Rate Rise Expectations Rising
Expectations for a rate hike have climbed dramatically in recent months since the resurgence in inflation started to look less like a one-off and more like a strengthening trend.
Before the jobs figures were released, money markets had fully priced in a 25-basis point increase by August, with traders implying there was about a 25% chance of a hike announcement on February 3.
After the release, that moved to above 60% and the discussion also moved into when and whether there would be a second rise.
Bad for Property and Shares
While rising interest rates are seen as being bad for the share and property markets, due to rising mortgage payments and the competing attraction of a higher risk-free rate of return, the news is not all negative.
A stronger jobs market and lower unemployment is great news for workers who are likely to likely to leverage higher pay and greater job mobility to their advantage.
There are also benefits to a stronger Australian dollar with travelling and buying goods from offshore getting cheaper, although our exports become more expensive and less globally competitive.
Inflation the Main Game
However, money markets have been wrong in the past and jobs data is volatile and is viewed quite cautiously by the Reserve Bank.
All of which adds a lot more importance to the announcement by Australian Bureau of Statistics when it releases its inflation numbers at about 11.30 am on Wednesday.
That trimmed mean inflation measure above 3.2% really is the one fabled missing ingredient needed for the Reserve Bank to change course and move rates up.
