TD Securities strategists Prashant Newnaha and Alex Loo report that Australian economic activity stabilized in April, with the services sector rebounding into expansion while manufacturing continued to contract [1]. Despite this mixed sectoral performance, both input and output prices surged to multi-year highs, with input prices reaching their highest level in four years and output prices at their highest in three and a half years, both well above historical averages [1].
The Flash Composite PMI Output index moved from contraction to expansion in April, driven entirely by the improvement in services activity, while manufacturing remained in contraction [1]. The Composite Employment Index also increased from 51.8 to 53.1, indicating a strong start for employment in the second quarter [1].
Given these developments, TD Securities expects the Reserve Bank of Australia (RBA) to implement a 25 basis point rate hike at its May meeting [1]. The strategists note that markets are currently pricing in about a 70% probability of this outcome [1].
The analysts emphasize that with activity stabilizing but price pressures accelerating to multi-year highs across both sectors, the case for further RBA tightening remains intact [1].
CONCLUSION
Australian price pressures have surged to multi-year highs, prompting TD Securities to anticipate a 25 basis point rate hike by the RBA in May. Market participants are assigning a 70% probability to this outcome, reflecting expectations of further monetary tightening amid persistent inflationary pressures.