Australian shares managed a modest gain on Friday, but the real surprise was who did the heavy lifting. Banks and technology stocks tied to artificial intelligence led the advance, even as traders sharply increased their bets that the Reserve Bank of Australia will raise interest rates again in September.
According to data from LSEG, a financial markets data firm, the probability of a September rate hike has jumped from just 16% before Wednesday's inflation release to better-than-even odds now. That shift reflects a hotter-than-expected inflation print that has forced investors to rethink their expectations for the central bank's next move.
Why higher rates usually hurt banks and tech
Rising interest rates are typically a headwind for stocks, but they don't affect all sectors equally. Banks, for instance, can sometimes benefit if they can reprice their loans faster than they raise the rates they pay on deposits. That dynamic can protect their profit margins even when the central bank tightens policy.
Technology companies, especially those with high growth expectations, are usually more sensitive to rate changes because their valuations rely heavily on future earnings. Higher rates reduce the present value of those future profits. Yet AI-linked tech names have been resilient in recent months, driven by enthusiasm over the potential of artificial intelligence to boost productivity and earnings.
Friday's move suggests that investors are looking past the immediate rate risk and focusing on the underlying strength of these sectors. It's a reminder that market reactions are rarely uniform, and that sector-specific factors can outweigh macro headwinds.
What the inflation data means for the RBA
The inflation print that triggered the repricing was hotter than economists had anticipated. While the brief doesn't specify the exact numbers, the market's reaction is clear: traders now see a more than 50% chance that the RBA will hike at its September meeting. That's a significant shift from just days earlier, when a hike was seen as a long shot.
For everyday investors, this means borrowing costs could rise again, affecting mortgages, business loans, and the broader economy. Higher rates can slow consumer spending and business investment, which in turn can weigh on corporate earnings and stock prices.
However, the fact that the ASX managed to rise despite these fears suggests that investors are not panicking. They may be betting that the RBA's tightening cycle is nearing its peak, or that the economy can absorb another hike without derailing growth.
What it means for your portfolio
For Australian investors, the key takeaway is that rate expectations are in flux, and that can create volatility. If you hold bank stocks, you might see some resilience if they can pass on higher rates. If you're in tech, be prepared for swings as rate news and AI sentiment battle for influence.
It's also worth noting that this isn't just an Australian story. Central banks around the world are grappling with similar inflation pressures. In the US, for example, traders are watching the Federal Reserve's Jackson Hole symposium for clues on the path of rates. Treasury yields have been dipping as investors await signals from Fed officials. Similarly, the dollar has firmed ahead of key data and speeches.
Global rate expectations can spill over into Australian markets, so keeping an eye on international developments is useful. For instance, sterling slipped as traders trimmed Bank of England hike bets, showing how quickly sentiment can shift.
The bottom line
Friday's session was a reminder that markets don't always follow the script. Even with rate-hike odds climbing, investors found reasons to buy banks and tech. But the situation remains fluid. If inflation stays hot, the RBA may have no choice but to act, and that could eventually test the resilience of these sectors.
For now, the ASX's modest gain suggests a market that is cautiously optimistic but not complacent. Investors should stay informed and consider how rate changes might affect their holdings, rather than making snap decisions based on a single day's move.
