Equity investors turn concerns back to inflation
- Local and global equity markets fell this week as investor concern increased regarding strong labour market and inflation data potentially forcing central banks to raise rates more aggressively.
- In local stock news, Magellan Financial Group reported $5.2 billion in net outflows during the June quarter, leaving it with $61.3 billion funds under The new CEO starts next week.
Central bank pressure rises on weaker data
- A mixed week for equity markets as investors digested a plethora of economic data, bringing in an end to the financial year.
- Investors have pared back expectations for US rate increases this year with the futures market showing traders assigning a 52% probability that the Fed will raise interest rates by another 2% this year, down from a probability of 74% just 1 week ago. Investors are also increasing bets that the Fed will start cutting rates in mid-2023.
Investors start pricing in recession
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Local and global equity markets fell this week as central banks got aggressive increasing the risks of recession.
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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.
Investors fret awaiting US inflation data
- 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.
Rate Rise
The Reserve Bank surprised the market today with a lift of 50 basis points, taking the cash rate to 0.85%.
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.
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.
Households are now dealing with rising electricity prices, rising petrol prices and higher repayments for the roughly one-third with a mortgage.
It is going to sting — particularly for households that took out a mortgage over the past year and have not built up large buffers in mortgage offset accounts. The RBA acknowledges this risk. But it also recognises average household balance sheets are in strong positions — many with solid buffers in mortgage offset accounts.
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.
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.
Central bank moves dominate investor sentiment
- 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.
RBA UPDATE May 2022
The RBA has increased the cash rate by 0.25% to 0.35% at their May meeting.
The move was largely expected given the recent Q1 inflation print which came in higher than expected with headline inflation at 5.1% and underlying at 3.7%, noting that the RBA’s target is 2-3% underlying inflation through the cycle. The only call against a rate rise, a weak one at that, was that the RBA traditionally doesn’t move rates up or down in an election month.
A fair degree of change in the RBA’s statement versus last month caused a reasonable move across markets today. The degree of change in rhetoric was always going to be interesting in terms of a mea culpa and any forward guidance, and there was plenty of both.
The effect of rising inflation
The word ‘inflation’ doesn’t only dominate business news headlines but finds its way into general news reports too. So, what is inflation and how does it affect you?
In simple terms, inflation signifies a rise in the price of goods and services, meaning you pay more for every purchase you make.
Aussie dollar falls on surging USD
- 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.
FEDERAL BUDGET UPDATE: 2022 – 2023
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.
RBA DECISION – FEBRUARY 2022
RBA CASH RATE ON HOLD, QUANTITATIVE EASING COMES TO AN END
The Reserve Bank of Australia decided to maintain the Cash Rate at 0.10%, as expected but decided to put an end to their asset-buying program (i.e. money printing) of $4 billion per week.
Interestingly, the Bank took the rather direct measure of very clearly dispelling any views or thoughts that an end to the asset-buying program would give a green light to near-term rate rises. They made it abundantly clear (literally spelled it out) in no uncertain terms that they will not increase the cash rate until actual inflation is sustainably within the 2-3% target range and that it was way too early to conclude that it was already sustainably within the band. They reiterated the uncertainties regarding how persistent high inflation will be given most of it is being caused by supply-side factors linked to the Covid health policy response.
Wages growth is what they’re focused on, with current growth alone not sufficient to meet their inflation targets.
RBA Decision December 2021
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.