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Australia's RBA Meeting: Market Hinges on Critical Interest Rate Decision

As global markets hold their breath, all eyes are on the Reserve Bank of Australia’s (RBA) upcoming rate decision, which could either elevate or ease economic pressures in the region.

Reserve Bank of Australia
Reserve Bank of Australia

Tensions Mount as RBA Takes Spotlight

In an atmosphere of increasing tension, the Reserve Bank of Australia (RBA) prepares to take the spotlight this Tuesday. Market analysts are on tenterhooks as economists hint at a possible 25 basis point hike in the benchmark cash rate to a record 12-year peak of 4.35%.

Other Asian Markets Follow Cautiously Amid U.S Holiday

Meanwhile, the South Korean consumer price inflation data for June emerges as the second regional focal point for Asian markets. Trading activity is expected to be more restrained than usual, due to the Independence Day holiday in the United States.

Aggressive Trading Opens New Quarter

Investors worldwide kicked off the new trading quarter with a markedly aggressive risk appetite. Global stocks enjoyed their fifth consecutive day of growth on Monday. Similarly, pan-Asian stocks (excluding Japan) surged 1.5%, marking their best performance in a month, while a nearly 7% rally in Tesla shares gave Wall Street a boost.

High Yield Bonds Maintain Resilience Amid Economic Indicators

Despite signs of higher rates, bond yields, and borrowing costs, high-yield bond indexes remain stable, with U.S. junk bond prices hitting several-month highs. Investors appear to be overlooking warnings from the U.S. yield curve as the gap between two- and ten-year yields increased to 110 basis points, signaling a potential recession on the horizon.

Asian Traders Pin Hopes on RBA Decision

Asian traders are eagerly awaiting Tuesday's RBA decision. The outcome is still uncertain, as evidenced by a recent Reuters poll showing a nearly even split among economists; 16 of 31 predict a hike to 4.35%, while 15 foresee a pause.

RBA's Decision Could Prove Unlucky for Some

The looming rate decision would mark the 13th in the RBA's tightening cycle, potentially unsettling some. According to interest rate swap markets, the odds stand at a one-third likelihood of a hike, with a two-thirds probability of no action.

Inflation Dilemma Weighs on RBA

While inflation dipped to 5.6% in May from 6.8% in April, it continues to significantly exceed the RBA's 2-3% target range. This suggests further tightening may be necessary. However, the drop represents the steepest in two years, and the RBA has already surprised markets with a pause in April.

South Korean Inflation Slows Down

In South Korea, another Reuters poll indicates that economists expect a reduction in annual consumer price inflation to 2.85% in June, down from 3.3% - the lowest rate since September 2021.

South Korean Factory Activity Hits Record Slump

In a concerning development, South Korean factory activity contracted for a record 12th consecutive month in June, according to data released on Monday. This trend adds another layer of complexity to the already challenging economic landscape in Asia.