Australia’s TD Securities–Melbourne Institute inflation gauge fell 0.4% month on month in June, extending the pace of decline from a 0.3% fall in the previous reading. The data point suggests a slightly faster contraction in the gauge over the latest month.
The release compares June’s -0.4% outcome with the prior month’s -0.3%, indicating a 0.1 percentage point deeper monthly drop. No further breakdown was provided alongside the headline figure.
RBA Outlook and Shifting Interest Rate Expectations
The June inflation gauge shows a month-on-month price fall of 0.4%, deepening from the 0.3% drop seen in May. This second consecutive month of deflationary pressure signals that the Reserve Bank of Australia (RBA) may be forced to shift from its current neutral stance. We believe the probability of an interest rate cut in the next quarter has now substantially increased.
Given this outlook, we are positioning for lower interest rates by going long on Australian 3-year government bond futures. As expectations for a rate cut build, bond yields should fall, causing the price of these futures contracts to rise. The market is now pricing in over a 70% chance of a 25-basis-point cut by the RBA’s September meeting, a sharp increase from just 35% last week.
Currency, Commodity, and Equity Market Implications
A more dovish RBA will likely weigh on the Australian dollar, making it less attractive to hold. We are therefore buying AUD/USD put options, setting strike prices below the key 0.6500 technical support level. This view is supported by softening iron ore prices, which have fallen 8% over the past month, further weakening the currency’s fundamental support.
In the equity market, the prospect of cheaper borrowing costs could provide a tailwind for stocks. We are adding to long positions in ASX 200 index futures, as rate-sensitive sectors like real estate and banking tend to perform well in an easing environment. Historically, such as during the RBA’s 2019 easing cycle, markets rallied in anticipation of and following rate cuts driven by weak inflation data.
