In a holiday-shortened week in Australia, the release of December quarter (Q4) inflation data in Australia and New Zealand on Wednesday morning is the key event on the local calendar.

In Australia, headline inflation is expected to increase by 1.6% QoQ taking annual inflation to 7.6% YoY from 7.3% in Q3. A sharp rise in electricity prices will drive the increase after the expiry of state subsidies.

The trimmed mean is expected to rise by 1.6% YoY, taking the annual rate to 6.5% YoY from 6.1% in Q3. This would be the highest number since 1990 and likely mark the peak in inflation in Australia before it starts to turn lower, following the pattern viewed in the US, UK and the Eurozone in recent months.

The Australian interest rate market is 60% priced for a 25bp interest rate hike at February’s Board meeting, which would take the cash rate to 3.35%. Should inflation surprise to the downside on Wednesday, it would likely see the odds of the RBA delivering a 25bp rate rise in February fall below 50% and increase speculation the RBA will pause its rate hiking cycle.

In New Zealand, headline CPI is expected to rise by 1.3% QoQ vs 2.2% in Q3, allowing the annual rate to ease fractionally from 7.2% to 7.1%.

The RBNZ has flagged a 75bp rate hike from 4.25% to 5% when they meet in late February.

However, after a tripling in mortgage rates and softer housing and business surveys, the interest rate market reflects a 50% chance the RBNZ may downshift to 50 bp at its upcoming meeting.

What next for the ASX 200?

With a week still left to go, the ASX2 00 is up 6.15% for January, reclaiming all of December’s losses and more to be just 2% below its bull market 7632 high.

According to the RSI indicator, the ASX 200 has entered overbought territory, with some initial signs of bearish divergence. Ahead of the end of the month, we favour trimming longs ahead of the bull market 7632 high and looking to either buy a sustained break of the 7632 high or a pullback into the 7200/7000 support area.

As a side note, spare a thought for Australian Fund Managers who frequently take the opening weeks of January away from markets to freshen up and spend time with family and friends.

For those who may have increased their cash holdings and positioned defensively at the end of 2022 or need to allocate new inflows into the market, the question they face on their return to the office is do they chase the market after its +6% rally in 2023 or do they wait patiently and hope for a pullback?

Both choices make for an uncomfortable start to 2023.

ASX 200 daily chart

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