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The share market gave up early gains after the Reserve Bank’s preferred inflation measure jumped more than expected, increasing pressure on the bank to raise rates.

The S&P/ASX 200 skidded almost 30 points in five minutes after the consumer price index was released. The reversal flipped a gain of around 25 points into a mid-session deficit of 12 points or 0.16 per cent.

Woolworths was the heaviest weight on the index after warning food sales slowed as the eastern states emerged from lockdown. The major miners also retreated. Gains in Telstra, CSL and NAB helped cushion the market from a deeper loss.

What’s driving the market

Inflation worries flared after a measure of core inflation climbed to its highest in six years. 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 bank’s current guidance on official rates indicates no increase until at least 2024. However, futures trading suggests the market expects the bank to raise the cash rate sooner to contain inflationary pressures.

“This will only fuel market pricing that the RBA will need to tighten policy sooner than its current forward guidance,” Alex Joiner, chief economist at IFM Investors, said.

AMP chief economist Shane Oliver tweeted the increase “likely brings fwd the first hike to late 2022”.

The dollar jumped almost a third of a cent as traders adjusted their rates expectations. The Aussie was last up 0.39 per cent at 75.29 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 around four basis points to 1.855 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.

Going up

The morning’s best performers were Reliance Worldwide +4.42 per cent, Uniti Group +4.28 per cent and Netwealth+3.93 per cent.

Telstra climbed 2.11 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 +1.68 per cent, Goodman Group +0.27 per cent and CSL +0.18 per cent. Strength in LNG prices helped boost Woodside Petroleum 0.37 per cent.

The major banks were mixed. NAB put on 0.62 per cent, Westpac 0.23 per cent and CBA 0.16 per cent. ANZ fell 0.16 per cent.

Going down

Woolworths dropped 3.01 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 1.26 per cent. IAG operator Metcash gained 0.24 per cent.

Dairy company A2 Milk sank 10.95 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 1.5 per cent, BHP 1.2 per cent and Fortescue Metals 1.74 per cent.

Other markets

Asian markets faded as the morning wore on. The Asia Dow shed 1.04 per cent, China’s Shanghai Composite 0.5 per cent, Hong Kong’s Hang Seng 1.38 per cent and Japan’s Nikkei 0.62 per cent. US futures were flat.

Oil fell back from a three-year high. Brent crude declined 43 US cents or 0.5 per cent to US$85.22 a barrel.

Gold dipped 40 US cents or 0.02 per cent to US$1,793 an ounce.

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