ASX 200 Holds Near Seven-Week High as Investors Brace for RBA's Possible Fifth Rate Hike on Melbourne Cup Day

SYDNEY — Australia's share market edged lower on Monday as investors turned cautious ahead of an expected interest rate increase from the Reserve Bank of Australia, after the benchmark index posted its best week since August.

The S&P/ASX 200 index was down 0.2% at 8,892 points late Monday morning, with technology and mining stocks leading declines, while banks rose after strong results from Westpac.

The pullback followed a solid run last week. The index rose 0.5% on Thursday to close at 8,891.8, gaining 44.5 points, then added another 16.3 points, or 0.18%, on Friday to finish at 8,908.1.

Best week since August

Friday's close was the index's highest since Sept. 9. The ASX 200 gained 1.28% for the week, its strongest weekly performance since early August, and rose 1.35% for October. That marked a recovery from September, when the index fell 3.2%.

The benchmark is up about 2.2% for the year, lagging well behind Wall Street, where the artificial intelligence boom has powered much larger gains despite a recent pullback. The index has traded between 8,262.4 and 9,296.7 over the past 52 weeks.

Rate-sensitive and defensive sectors led October's gains. Utilities jumped 9.34% for the month, banks rose 7.68%, financials gained 6.91% and healthcare climbed 6.32%.

Volatile finish to the week

Friday's session was choppy. The index climbed as high as 8,992.7, a gain of about 1.1%, before giving back most of its advance as U.S. stock futures slid following a historic share price plunge at Google parent Alphabet, which reignited worries about heavy AI-related spending.

Retailers drove much of the action. Coles slumped 7.6% after reporting weak supermarket sales and signaling that first-half earnings were likely to be flat. Rival Woolworths rose 1.9% on stronger food sales.

Wesfarmers climbed 3.2%, Brambles advanced 2.3% and Aristocrat Leisure gained 2%, helping lead the market higher.

Hot inflation sets the stage

The main driver of investor sentiment this week is Australia's stubborn inflation.

On Wednesday, data showed annual consumer price inflation rose to 4.3% in September from 4% in August. The hotter-than-expected figure revived expectations for another rate hike, and the ASX 200 gave up an early rally to close flat that day.

Data center operator NextDC led gainers on Wednesday with a 9.6% jump, while plumbing supplies company Reece fell 8.7%.

RBA decision Tuesday

The Reserve Bank will announce its rate decision at 2:30 p.m. Tuesday, Melbourne Cup day, along with updated economic forecasts. Governor Michele Bullock will hold a press conference an hour later.

Money markets are pricing in about an 80% chance of a 25-basis-point increase. Most economists expect the central bank to raise its cash rate to 4.85%, an 18-year high, in what would be its fifth hike this year and an extension of the most aggressive tightening campaign in the developed world.

Market expectations for a hike rose from about 60% before last week's inflation report.

A rate increase would make the RBA an outlier among major central banks. The U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of New Zealand all held rates steady in recent days.

Policymakers have signaled growing concern that high inflation is becoming entrenched. Deputy Governor Andrew Hauser said last month that a growing share of businesses see inflation of 3% to 3.5% as the new normal, a scenario he described as the central bank's worst nightmare.

Bullock has signaled that the labor market likely needs to loosen further, even though unemployment has risen to 4.7% from 4.1% this year.

Economists at Citi warned that inflation "may become embedded in society" as fuel and food prices rise, saying the risk to their forecast is now a cash rate above 5%. UBS economist Stephen Wu said any surprise pause would likely be a hawkish hold setting up a delayed hike in December.

Banks rally on Westpac results

Banks were a bright spot on Monday after Westpac reported a full-year profit of 6.8 billion Australian dollars.

Bank stocks have performed strongly in recent weeks as rising rates are expected to support lending margins. ANZ and Westpac shares both gained more than 5% in October.

Ahead of the RBA decision, retailers were split, with consumer discretionary stocks gaining and consumer staples falling.

Global headwinds

Global markets weighed on sentiment heading into the new week.

On Wall Street, the S&P 500 fell 1.82% on Friday to 7,580.07, as investors cut exposure to AI-related companies amid renewed concerns about heavy capital spending and uncertain returns. Technology stocks led the decline, and investors shifted toward safer assets such as government bonds.

Cryptocurrency markets were also shaken by a record hack at the Binance exchange, in which an estimated $6.3 billion in digital assets was stolen.

Investors are also watching the U.S. midterm elections on Tuesday, which could add to market volatility.

Commodity prices remain a factor for Australia's resource-heavy market. Oil prices have hovered near multimonth highs, with Brent crude trading around $115 a barrel late last week.

Australian dollar

The Australian dollar traded at about 70.34 U.S. cents on Friday, little changed, as markets awaited the central bank's decision.

Tuesday's RBA announcement is the key event for local markets this week. A rate hike in line with expectations may have a limited immediate impact on stocks, but the central bank's tone and forecasts will shape views on whether more increases lie ahead.

Investors will also watch further bank earnings and U.S. jobs data later in the week for clues about the global economic outlook.