Local and global equity markets fell this week as central banks got aggressive increasing the risks of recession.
In local stock news, ResMed agreed to acquire German healthcare software company Medifox Dan for US$1 billion, with the company planning to integrate their out-of- hospital software solutions into its software-as-a-service offering.
- Local and most global equity markets fall this week as investors fretted over pending US inflation data following reasonably strong US labour market data. Asian equity markets were the one highlight.
- In local stock news, hospital and pathology operator Healius shares fell after the company said 1st half trading had been strong but that it expected more difficult market conditions in the 2nd half of the year.
The RBA now joins the 50-point hike club along with the Federal Reserve, Bank of Canada and Reserve Bank of New Zealand. It’s the RBA’s biggest rate increase since February 2000 and only the fifth time we’ve seen a move of 50bps or more since the introduction of the cash rate target.
What prompted the big move?
The cash rate has been held too low for too long and the RBA is behind the curve. They are moving more quickly to get closer to neutral.
There wasn’t any particular economic data release you could point to — wage price index data was weaker (although they prefer their own business liaison results) and the unemployment rate at 3.9% was pretty much in line with the previous month. Economic growth was solid but no smoking gun. Inflation is now higher than expected due largely to the conflict in Ukraine and Covid-related supply disruptions. Tightness in the domestic labour market and the effect from the floods on food prices are also putting upward pressure on inflation.
Where to now?
“The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market,” the RBA said in their statement
“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
I view 50 basis points next month as more probable than 25.
A cash rate closer to 3% by the end of the year? Market pricing is aggressive. But at the moment I wouldn’t rule anything out.
What does it mean for investors?
The questions for asset owners is: while markets are looking for another 3% of rate hikes in the next 12 months, is the economy ready for it? The RBA tried to imply the economy would be resilient. But the tide is now going out.
The first 1.5% of hikes will see belt-tightening, but probably no more. However the next 1.5% could see actual stress, especially in housing. This is an experiment the RBA hasn’t undertaken for more than a decade — and risks of a policy error are rising.
- Local and global equity markets fell this week as US equity volatility and central bank rate rises hit investor sentiment.
- US corporate profits are on track to rise 7% for the 1st quarter, which would be the lowest year on year earnings growth rate since the last quarter of 2020. Still, more than 80% of companies that have reported to date have beaten analyst expectations.
- Local and global stocks largely finished flat for the week as markets recovered from falls earlier in the week.
- In local stock news, Coles Group announced March quarter sales up 3.9% to $9.3 billion, even as flooding in NSW and QLD forced the temporary closure of 130 stores.
Last night’s Federal Budget contained several proposals that will impact personal financial planning advice.
Importantly, these proposals require the passage of legislation before they are implemented.
At their December meeting, the Reserve Bank of Australia (RBA) maintained their policy settings – ie. the cash rate target at 0.10% and will continue to purchase government bonds (print money) at a rate of $4 billion a week until at least mid-February 2022.
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