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An early rally largely fizzled out after a hotter-than-expected inflation report sharpened fears official rates may rise as soon as next year.

The S&P/ASX 200 cut a 30-point rally to a final gain of five points or 0.07 per cent. The market gave up most of its advance as a jump in consumer prices lifted the dollar and bond yields.

Gains in Telstra and most of the banks kept the market in positive territory. Woolworths was the heaviest weight on the index after warning of a slowdown in food sales.

What moved the market

A choppy session saw the index reach a six-week high before the mid-morning release of September quarter inflation figures set the cat amongst the pigeons. The dollar and bond yields jumped and shares fell as a spike in core inflation increased pressure on the Reserve Bank to raise the cash rate.

The trimmed mean consumer price index surged 0.7 per cent last quarter to an annual rate of 2.1 per cent. Economists had anticipated a more modest increase of 0.5 per cent. Crucially, the increase lifted core inflation to within the RBA’s target band of 2-3 per cent.

“The lift in Australia’s underlying inflation was key for the Q3 CPI, with the annual figure above 2% for the first time since 2015. This will put some pressure on the RBA to rethink its forward guidance for the cash rate,” ANZ’s research team tweeted.

AMP chief economist Shane Oliver said the increase likely brought forward the first rate increase to “late 2022”. CommSec chief economist Craig James was more circumspect.

“Underlying inflation now exceeds the Reserve Bank forecast of 1.75 per cent for December quarter. But it is still early days,” he said.

“The Reserve Bank would need to see a few more quarterly moves of 0.7 per cent before it accepts that inflation is sustainably back in the 2-3 per cent target band. The Reserve Bank will be alert at this point, but not alarmed.”

The dollar jumped almost a third of a cent as forex traders adjusted their rates expectations. The Aussie was last up 0.37 per cent at 75.28 US cents. A close at that level would be the highest since early July.

Long-term interest rates also rallied. The yield on ten-year Australian government bonds climbed five basis points before halving its advance at 1.841 per cent. The three-year yield passed 1 per cent for the first time since 2019.

Increases in fuel and the cost of construction were the biggest drivers of the 0.8 per cent rise in the base consumer price index, according to ABS head of prices statistics, Michelle Marquardt.

“Construction input costs such as timber increased due to supply disruptions and shortages. Combined with high levels of building activity, this saw price increases passed through to consumers,” Ms Marquardt said.

“Rising fuel prices also contributed to the September quarter CPI increase, with the CPI’s automotive fuel series reaching the highest level in its half-century history.”

Record closes for the Dow and S&P 500 overnight fuelled the market’s initial advance. The S&P 500 put on 0.18 per cent and the Dow 0.04 per cent.

Winners’ circle

The day’s best performers were Uniti Group +5.79 per cent, Reliance Worldwide +4.62 per cent and Whitehaven Coal +4.04 per cent.

Telstra climbed 3.16 per cent to a two-and-a-half week high. The telco announced on Monday the federal government would bear most of the cost for its acquisition of South Pacific firm Digicel.

Other heavyweight gains included Aristocrat Leisure +2.08 per cent, CSL +1.01 per cent and Goodman +0.31 per cent. Strength in LNG prices helped boost Woodside Petroleum 0.83 per cent.

The major banks were mixed. NAB put on 1.38 per cent, Westpac 0.62 per cent and CBA 0.95 per cent. ANZ fell 0.07 per cent.

Doghouse

Woolworths dropped 3.24 per cent after warning of supply chain issues and a slowdown in food sales this month as lockdown restrictions eased. The supermarket chain increased group sales by 7.8 per cent over the first quarter to $16.07 billion from the same period last year.

“Q1 F22 has arguably been the most challenging COVID quarter for our business, with the Delta variant causing major disruptions to our supply chain and stores, especially in NSW and Victoria,” CEO Brad Banducci said. “In October to date, sales have slowed in Australian Food as NSW lockdown restrictions have eased,” he added.

Rival Coles fell 1.03 per cent. IAG operator Metcash ended unchanged.

Dairy company A2 Milk sank 11.97 per cent after warning its revival plans were clouded by uncertainties in its key Chinese market. Sales have been dented by falling Chinese birth rates, a new Chinese registration process, Covid and deteriorating relations with China. Rival Bubs eased 1.94 per cent.

Shares in Vulcan Energy were placed in a trading halt following a scathing attack from a shortseller published after yesterday’s market close. J Capital, which has a short position in the lithium hopeful, accused the company of exaggerating the prospects for its flagship German project. Vulcan said the report “makes a large number of inaccurate statements and assertions”. The company requested a halt so it could prepare a more detailed response.  

The major miners declined following pressure on industrial metals overnight. Rio Tinto shed 1.83 per cent, BHP 1.44 per cent and Fortescue Metals 2.57 per cent.

Codan slumped 18.77 per cent as investors thumbed down the tech firm’s
AGM trading update.

Other markets

Asia‘s major markets were all firmly underwater in afternoon trade. The Asia Dow shed 0.78 per cent, China’s Shanghai Composite 0.92 per cent, Hong Kong’s Hang Seng 1.52 per cent and Japan’s Nikkei 0.42 per cent. US futures were flat.

Oil fell back from a three-year high. Brent crude declined 45 US cents or 0.53 per cent to US$85.20 a barrel.

Gold dipped US$3.40 or 0.2 per cent to US$1,790 an ounce.

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