Australia's inflation remains above the central bank target.

The Australian dollar has weakened sharply as investors anticipate the Reserve Bank of Australia's (RBA) first rate cut amid signs of slowing economic activity. Market projections suggest the RBA might begin lowering interest rates as early as February, as inflation continues to decline while domestic economic indicators point to more negative trends. However, the Australian dollar remains under pressure from the rapidly strengthening US dollar, following a 25 bps rate cut by the Federal Reserve. Additionally, the People’s Bank of China maintained its interest rates without announcing any new stimulus measures, potentially slowing international trade, particularly with Australia as its largest trading partner.

Private sector credit in Australia increased by 0.5% month-over-month in November, aligning with market expectations. This marked the fastest growth in four months. However, business loans slowed slightly to 0.7%, while housing credit remained steady at 0.5%. Meanwhile, personal loans decreased by 0.2%, indicating a continued slowdown in household spending capacity. Year-on-year, private sector credit rose by 6.2% through October, the highest rate since May 2023.

Consumer inflation expectations in Australia rose to 4.2% in December, up from 3.8% in the previous month, reaching the highest level since September. This increase followed the RBA's decision to keep interest rates unchanged at 4.35% for the ninth consecutive time. Although the central bank acknowledged a significant decline in headline inflation, it also warned that core inflation remains excessively high. Monthly inflation rose by 2.1% in October, driven partly by the expiration of energy cost relief measures implemented last year. Nevertheless, inflation remains above the central bank's target range of 2-3%.

The Consumer Confidence Index fell by 2% to 92.8 points in December, reversing the positive momentum of the previous two months. This decline reflects renewed pessimism about the economic outlook. Expectations for the economy over the next 12 months dropped by 9.6% to 91.2 points, while five-year expectations fell by 7.9% to 95.9 points. The downturn was driven by lower-than-expected GDP growth in Q3, concerns over inflation, and uncertainty about the timing of rate cuts. However, there remains some optimism that household purchasing power might remain stable in the near term.

The yield on Australian 10-year government bonds surged to 4.54%, with domestic yields rising in tandem with US Treasury yields. This came after the Federal Reserve signaled a more moderate approach to rate cuts next year. Investors are also closely monitoring the release of the Personal Consumption Expenditures (PCE) data, one of the key inflation metrics, for further insights into the US economic outlook.