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Post Market Wrap | Federal Reserve raises interest rate by a quarter of one percent

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Strong wages growth, rising employment and higher energy costs fuelling inflation 
  • Likelihood of 2 percent interest rate by end of calendar year 2022
  • Consensus is for 3 percent interest rate by end of calendar year 2023
  • Announcement widely anticipated and well received by market generally

US Interest Rate Rise  

The US Federal Reserve board decided to raise the Federal Funds Rate by a quarter of a percent overnight to a target range of a quarter to a half percent. The Federal Reserve referred to strong employment growth and elevated inflation levels as the primary reasons for its decision. Reference was also made to the Russian invasion of Ukraine which is creating upward pressure on energy prices.   

The rate rise was widely anticipated by the bond market, which is why long-term bond rates barely moved on the announcement. The bond market has been telling us for months that we have an inflation problem, with long dated bond yields rising steadily in the lead-up to last night’s Federal Reserve announcement. 

The Federal Open Market Committee (FOMC) stated that economic indicators including employment and wages growth reveal that the US economy is strong.  These circumstances, while supporting a rise in economic activity, when accompanied by a tight labour market, call for decisive action on the interest rate front. In the view of FOMC officials, signs of inflation early last year were attributed to supply chain constraints brought about by lockdowns related to the global COVID-19 pandemic. However, their view now is that inflation is more broadly based, and the most appropriate response is higher interest rates.      

Why is the Federal Funds Rate important?

The Federal Funds Rate is the overnight rate at which the Federal Reserve lends to US banks and so is the benchmark rate at which banks lend to and borrow from each other. If this rate rises, US banks pass on this higher interest rate to their customers. This includes consumer and business loans. The ultimate outcome is less borrowing which restrains spending and this reduces inflationary pressures, because the ability to pass on price rises throughout the economy, is diminished.  Once the inflationary pressures ease, interest rates stabilise, enabling the economy to steadily grow at a sustainable rate. This rhythmic pattern is known as the economic cycle.   

Image: File

Market Implications

In its market release accompanying the rate rise, the FOMC stated it intends to continue raising rates so that the Federal Fund Rate reverts to at least the level that prevailed prior the onset of the global pandemic. The target date to achieve this is the end of calendar year 2022. This statement implies that the FOMC plan 6 more rate rises of a quarter of a percent, over the coming 9 months. This will take the Federal Funds Rate to 2 percent.  The bond market appears relaxed at this prospect, because it is widely recognised that the extraordinary decision to cut interest rates to zero at the height of the pandemic was always a temporary measure to deal with a one in a hundred-year event.  

Equity markets around the globe, including Australia, have also responded positively to the FOMC announcement of a sustained period of interest rate rises over the coming 2 years. This was exemplified by a sharp 1.5 percent rise in the Dow Jones Industrial Index and a 2.2 percent rise in the broader S & P 500 Index and a 3.7 percent jump in the technology heavy NASDAQ, as the FOMC decision was released. Australian markets are also higher today, with the ASX200 up 1.05 percent and the broader All Ords Index up 1.16 percent. History shows that equity markets tend to follow the economy, not the interest rate. This has been confirmed by the strong equity markets seen immediately post the FOMC announcement.

What’s Next?

Beyond the 2 percent target interest rate by the end of 2022, market consensus is for a 2.75 to 3 percent interest rate by end of calendar year 2023. Beyond 2023, present market consensus is that rates would not need to be raised above 3 percent. 

This scenario poses little or no threat to the medium-term economic outlook and should support equity and debt markets as well.

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.

Michael Kodari is one of the world's most consistent, top performing investor. A philanthropist and one of the prominent experts of the financial markets, he has been referred to as ‘the brightest 21st century entrepreneur in wealth management' by CNBC Asia and featured on Forbes. Featured on TV as the "Money Expert", on the weekly Sunday program "Elevator Pitch", he is recognised internationally by governments as he was the guest of honour for the event "Inside China's Future", chosen by the Chinese government from the funds management industry, attended by industry leaders, when they arrived in Sydney Australia, on April 2014. Michael and George Soros were the only two financiers in the world invited and chosen by the Chinese government to provide advice, and their expertise on Chinese government asset allocation offshore. With a strong background in funds management and stockbroking, Michael has worked with some of the most successful investors and consulted to leading financial institutions. He was the youngest person ever to appear on the expert panel for Fox, Sky News Business Channel at the age of 25 where he demonstrated his skillset across a 3 year period forming the most consistent track record and getting all his predictions right over that period. Michael writes for key financial publications, is regularly interviewed by various media and conducts conferences around the world.

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Is Netflix going bankrupt?

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2022 hasn’t been good for the streaming giant, In April alone the company said that they lost subscribers for the first time in ten years

And on top of that, it’s stock price has plummeted more than 60% so far this year.

Some have speculated that these are indications that Netflix is going down, and going down fast.

But they’re probably wrong, because Netflix is simply transforming into what CNN Business has referred to as a ‘traditional media company’.

What does that entail?

Like many technology companies, Netflix relied on subscribers and that was based on producing plus streaming movies and tv shows-on the platform in return for a fee.

It was only in 2019 when Netflix was ranked as America’s fastest growing brand, and many conventional media companies like Disney, Paramount and Warner Bros. amongst others started imitating the Netflix model.

But now it seems, Netflix will imitate them. And that means it will start having advertisements.

And the streaming platform has already changed the way it’s releasing new shows.

Instead of what we’re used to, which was a release of the entire series – to a more gradual release.   

And the streaming company also says that it will crackdown on password sharing.

Netflix has always been regarded as a tech company, but now it’s transitioning to a media company.

It’s not in trouble, It’s simply transforming to a more traditional business model.

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Meta faces a probe into triggering poor mental health

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Meta is facing a string of lawsuits that relate to the mental health of young people

The legal disputes blame Instagram for eating disorders, depression and even suicides among children and teens.

It comes after whistle-blower Frances Haugen exposed internal documents about how Instagram impacts body image and mental health.

The leaks allegedly show Meta is aware that its products hurt children but the company chose to put its growth and profits ahead of user’s safety.

Meta has not responded to these latest legal blows.

Of course, if you or someone you know needs help, please contact your local helpline.

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Musk creating hybrid of Uber and Airbnb

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Musk is predicting the company’s robotaxi will be like a combined version of Uber and Airbnb

Unlike Uber though, Musk says the system is not being designed with a launch city in mind, the way competitors have approached the concept.

Are we better off without Uber and taxi drivers?

Musk said Tesla owners will have the choice of using it themselves or adding their cars to the robotaxi fleet to earn money when they do not need them.

The tech billionaire mentioned that regulatory hurdles will limit where it can be deployed.

He estimates that a typical vehicle added to the system will see its usage jump from 12 hours a week to 60 hours a week and become a revenue generator for the owner of the Tesla.

The idea is that when your car is parked, it then joins the fleet and takes off on its own with no driver.

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