Conflict, inflation and market correction weigh on Australian shares

The Reserve Bank of Australia, which will hand down its next decision in a fortnight, will be monitoring Powell’s latest statement, which warned of sticky high inflation, partly driven by services.

And although the RBA has not always been guided by the Fed (after the 2008 global financial crisis, Australia moved to raise the cash rate while the US was still slashing), Oliver said the RBA would be concerned if the Fed left interest rates high for longer, putting further pressure on the already weak Australian dollar.

The Australian dollar was below US64¢ last week, raising the risk of import price inflation.

Eightcap market analyst Zoran Kresovic said the RBA would be monitoring an underlying measure of inflation, trimmed mean inflation, which picked up slightly in February from 3.8 per cent to 3.9 per cent.

If that data, which strips out irregular or temporary price changes, comes lower than expected, Kresovic expects it would open the door to at least one rate cut this year, either in August or September.

“Headline inflation is continuing to rise on the basis that crude oil and gas is continuing to edge higher, and therefore we will probably see headline inflation figures coming high,” Kresovic said.

There will be a string of US earnings reports released this week, and more quarterly updates from local mining stocks, which will weigh on the ASX, said MPC Markets chief executive Mark Gardner.

“May generally is the worst month for Australian equities. It’s when we usually see a decline of about 1 per cent,” Gardner said. “We’re recommending to our clients to lighten up and go cash due to the seasonal weakness.”

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.