Inflation clouds loom for investors

THE Australian sharemarket is expected to open slightly weaker on Monday, despite Wall Street’s 1 per cent rise on Friday night, with any bullish spirits among investors likely to be reined in as fears continue to grow that central banks will tip the global economy into a recession to keep inflation in check.

The current tussle between central banks, led by the Federal Reserve and European Central Bank, and investors will play out this week with any flare-up in inflation likely to spook markets into thinking more rate hikes will dominate the start to 2023 to further slow economies and weigh on share prices.

In Australia that battle will play out when December quarter inflation data is released on Wednesday, which economists at Westpac expect will show a rise of 1.5 per cent quarter-onquarter, taking annual inflation to 7.4 per cent.

Although a step down from the 1.8 per cent leap in the third quarter, the Reserve Bank is still likely to shift official interest rates higher by 75 basis points over the next three months. Starting with a 25 basis point hike in February, economists fear it will stall Australia’s economic growth at best, but in a worst-case scenario could plunge the country into a full-blown recession.

Giving some hope to local investors however is the upcoming reporting season, with some early trading updates from retail companies demonstrating strong consumer spending in the six months to Christmas.

The local futures point to an opening for the benchmark S&P/ASX 200 Index of 7428 points, against Friday’s close of 7452.2 points.

This is despite a strong performance on Wall Street, where the Dow Jones Industrial Average gained 331 points, or 1 per cent, on Friday night to end a three-day losing streak, while the S&P 500 rose 1.89 per cent. The tech-heavy Nasdaq Composite rallied 2.66 per cent, its largest one-day percentage gain in six weeks.

Despite the strong rally on Friday, US and European sharemarkets had pulled back over the last week on recession and earnings worries.