ASX 200 index on edge as Australian bond yields fall after inflation cools

The ASX 200 Index remained in a tight range while Australian bond yields fell after the latest consumer inflation report. It was trading at A$8,660, a few points below this week’s high of A$8,715. 

RBA likely to pause interest rate hikes

The ASX 200 Index wavered after a report by the Australian Statistics Bureau (ABS) hinted that the country’s central bank will leave interest rates unchanged in the coming meeting on June 16.

This report showed that the headline consumer price index (CPI) rose 4.2% in April, after rising 4.6% in the previous month. The figure was modestly lower than the consensus estimate of 4.4%. Inflation softened from 1.1% to 0.4% on a monthly basis. 

The closely-watched weighted mean CPI rose 3.5%, while the trimmed mean figure rose 3.4%. While these numbers are outside the RBA’s target gauge of between 3% and 4%, there are signs that the bank will maintain status quo.

The RBA, which has already delivered three interest rate hikes, is concerned about the labor market. A report released last week showed that the economy shed jobs, while the unemployment rate rose in April. 

These numbers helped to drag Australia’s government bond yields lower. Data shows that the ten-year yield dropped to 4.86%, its lowest level since April 8 this year. It has been in a slow downward trend after peaking at 5.182%. 

The same happened to the two-year bonds, whose yield dropped to 4.53%, its lowest level since March 19, and lower than the year-to-date high of 4.919%. 

Stocks tend to do well when government bond yields are falling as this normally makes them attractive to investors. Also, they help to reduce corporate borrowing costs. The rising interest rates partially explains why the ASX Index has lagged behind its global peers. 

Australia’s inflation is being driven by the rising housing and energy prices. Fuel costs have been in an uptrend since the Iran war started a few months ago, which pushed global oil prices higher. Brent and the West Texas Intermediate (WTI) have jumped by double digits since the war started.

ASX 200 Index technical analysis

ASX 200 Index chart | Source: TradingView

The daily chart shows that the ASX 200 Index has remained in a narrow range in the past few days. It remains about 6.15% below its highest point this year, while some top indices like the Kospi and Nikkei 225 are trading at their all-time highs.

The index remains slightly below the 50-day and 100-day moving averages, which formed a bearish crossover in May this year. Also, it remains between the support and resistance levels at A$8,380 and A$9,083.

Therefore, the index will likely remain in this range in the coming days. The bullish outlook will be confirmed if it moves above the two moving averages. If this happens, it will likely rise and retest the psychological point at $9,000.

On the other hand, a drop below the key support at A$8,488 will invalidate the bullish outlook, and point to more downside, potentially to A$8,380.