The ASX 200 index is currently facing pressure as it approaches the critical neckline of a head-and-shoulders topping pattern. This suggests a potential downward trajectory, with initial support projected at 8265 and a further decline towards the 8200 mark.
The recent downturn in the ASX 200 is a result of investors reassessing the likelihood of an interest rate cut by the Reserve Bank of Australia (RBA) in February. This reassessment follows a strong November jobs report, which revealed an unemployment rate of 3.9%, lower than the RBA's forecast of 4.3% for December. The positive labor market data has tempered expectations for a rate cut, which was previously priced in at a 63% probability by the Australian rates market.
The solid jobs report has led to a reevaluation of the RBA's monetary policy stance, particularly in light of the recent weak third-quarter GDP reading. While the RBA had previously indicated a dovish pivot, suggesting confidence in declining inflationary pressures, the latest employment figures have introduced uncertainty regarding future rate cuts. As a result, the probability of a rate cut in February has dropped to below 40%, leading to a rise in Australian bond yields by 9 to 11 basis points across the curve.
Market participants are now closely monitoring upcoming economic indicators, such as the December labor force data scheduled for release on January 16, 2025, and the fourth-quarter consumer price index set for January 29, 2025. The RBA's first Board meeting of 2025 on February 18 will also be important in shaping market expectations.
The ASX 200's decline has been particularly notable in interest rate-sensitive sectors, with the property sector experiencing significant losses. Major players in the sector, including Mirvac Group, Domain Holdings Australia, and REA Group, have all seen their stock prices fall. The consumer discretionary sector has also retreated from its record highs, with companies like Baby Bunting and Adairs facing significant declines.
On the other hand, the mining sector has shown resilience, with companies like Mineral Resources and Fortescue Metals Group consolidating gains from earlier in the week. The banking sector has had mixed performance, with Macquarie and National Australia Bank posting slight gains, while Australia and New Zealand Banking Group and Westpac experienced minor losses. The energy sector, which has struggled throughout 2024, saw a rebound due to a rise in crude oil prices, supported by new sanctions on Russian oil from the European Union.
As the ASX 200 navigates these challenging times, the interplay between economic indicators, sector performance, and market sentiment will be crucial in determining the index's trajectory in the coming weeks. Investors are closely monitoring further data that could provide clarity on the RBA's monetary policy direction and its implications for the broader Australian economy.