Money
Post Market Wrap | Inflation Shock May Prompt RBA To Hike Rates As Early As Next Week
This Post Market Wrap is presented by KOSEC – Kodari Securities
- Headline annual inflation rate 5.1 percent and underlying inflation 3.7 percent
- Current official interest rate setting of 0.1 percent is no longer appropriate
- RBA dilemma: 0.15 percent increase next week or 0.4 percent next month?
- Capital markets are braced for interest rates to normalise.
Not if, but when and how much?
The Reserve Bank of Australia (RBA) is faced with the prospect of runaway inflation if it doesn’t increase the official interest rate at its board meeting next Tuesday. This is the view of several leading economists in response to yesterday’s inflation data showing that the headline inflation rate is 5.1 percent pa and underlying inflation is now 3.7 percent. This is well outside the RBA’s stated inflation target range of 2-3 percent and the largest annual increase in inflation for more than 20 years. It comes at a time when interest rates are at a 40-year low and unemployment at a near 50-year low. Clearly history is not on the side of the RBA.
The driving factors pushing consumer prices higher are well documented, and include supply chain cost pressures, higher fuel, grocery, tertiary education, and higher new housing costs. This is before wage cost pressures emerge. Another emerging factor is the recent fresh break-out of COVID in China that is causing lockdowns that may see a worsening of the supply chain constraints for key components of manufactured goods and materials essential to the orderly functioning of the Australian economy. This confluence of events implies that the current RBA official interest rate setting of 0.1 percent is no longer appropriate.
The dilemma for the RBA is that the government is in election mode and any decision not to increase the official rate next Tuesday may be seen as politically inspired. The RBA is an independent Central Bank and must be seen always to act independently.
0.15 percent increase next week or 0.4 percent next month?
If interest rates are not increased next Tuesday, there is a risk that a rate rise at a later date may have to be higher than if a rate increase is announced next Tuesday. The market consensus is that a rate rise is necessary sooner rather than later, because this is what the data is already telling us: it wasn’t raining when Noah built the Ark!
A minimum 0.15 percent increase to the current 0.1 percent official cash rate, taking the official rate to 0.25 percent, is probable next Tuesday. If not, then the market widely anticipates a higher increase of 0.4 percent in June, taking the official interest rate to 0.5 percent.
If it’s in the news, it’s in the price
Market implications of an official interest rate rise, whether it is announced next week or next month, are likely to be muted, or neutral. Markets react poorly to surprises, and any interest rate rise announcement by the RBA next week, should not come as a surprise. Interestingly, if the RBA doesn’t announce an official rate rise next Tuesday, that may lead to a temporary market sell-off, because no change to official interest rates may come as surprise to some investment market participants.
You can’t predict the future; but one must prepare for it!
Inflation is here and the present near zero interest rate setting is no longer appropriate. Zero interest rates may explain the current historically high asset prices, but they don’t justify them. Asset price inflation works for many investors (and homeowners), but it doesn’t do much for economic growth.
This is why interest rates will soon begin to normalise. Investors should prepare for this scenario as it unfolds in the weeks and months ahead.
Money
Inflation rise reduces chances of Reserve Bank rate cut
Inflation spikes, drastically reducing chances of a Reserve Bank rate cut amid economic pressures and rising costs
Inflation spikes, drastically reducing chances of a Reserve Bank rate cut amid economic pressures and rising costs
– Rate cut likelihood by the Reserve Bank has decreased due to a rise in annual inflation to 3.2 per cent.
– Significant price increases in housing, recreation, and transport are raising concerns for the Reserve Bank.
The likelihood of a rate cut by the Reserve Bank has decreased significantly after a surge in annual inflation.
The Australian Bureau of Statistics reported that inflation for the year ending September rose to 3.2 per cent, reflecting a 1.1 per cent increase.
Trimmed mean inflation, a crucial measure for the Reserve Bank, was recorded at 1 per cent for the quarter and 3 per cent for the year. The bank anticipates inflation to reach 3 per cent by year-end, while trimmed mean inflation is expected to slightly decrease.
The quarterly rise of 1.3 per cent in September exceeded expectations. Governor Bullock noted that a deviation from the Reserve Bank’s projections could have material implications.
Financial markets reacted promptly, with the Australian dollar rising against the US dollar, while the ASX200 index fell.
The most significant price increases were observed in housing, recreation, and transport, indicating widespread price pressures that concern the Reserve Bank.
Despite the unexpected inflation rise, some economists believe the Reserve Bank may still consider rate cuts in December, viewing current price spikes as temporary due to the winding back of subsidies.
Economic Pressures
Broad-based economic pressures suggest that the Reserve Bank may not reduce interest rates at its upcoming meeting. Analysts highlight the need for ongoing support for households facing cost-of-living challenges.
Money
Wall Street hits record highs on low inflation
Wall Street hits record highs on cool inflation and strong earnings ahead of key Federal Reserve interest rate decision
Wall Street hits record highs on cool inflation and strong earnings ahead of key Federal Reserve interest rate decision
– U.S. stocks rose to record highs on Friday due to lower inflation and strong corporate earnings.
– Key earnings reports from major companies are expected next week, influencing market trends.
The Labor Department reported that the Consumer Price Index was slightly cooler than analysts’ predictions, easing concerns about inflation impacts from tariffs. This development suggests a likely interest rate cut by the Federal Reserve at its upcoming meeting.
Ryan Detrick from Carson Group noted the positive inflation news may facilitate forthcoming Fed rate cuts. Despite the ongoing government shutdown affecting data releases, this CPI report provided much-needed clarity.
Earnings reports are continuing, with 143 S&P 500 companies having reported results. Growth expectations for third-quarter earnings have risen to 10.4%. Detrick indicated a strong opening to the earnings season with a significant percentage of companies exceeding expectations.
This coming week, key earnings will be reported from Meta Platforms, Microsoft, Alphabet, Amazon, and Apple, alongside industrial companies like Caterpillar and Boeing.
The Dow rose 472.51 points to 47,207.12. The S&P 500 increased by 53.25 points to 6,791.69, while the Nasdaq gained 263.07 points, reaching 23,204.87.
Alphabet gained 2.7% following a deal expansion with Anthropic. Coinbase saw a 9.8% increase from a JPMorgan upgrade. In contrast, Deckers Outdoor’s shares fell 15.2% after lowering sales forecasts.
Market Trends
Advancing stocks on the NYSE outnumbered decliners by 2.18 to 1. The S&P 500 had 34 new highs, with the Nasdaq recording 124.
Trading volume was 19.04 billion shares, lower than the average of the past 20 days.
Money
US stocks face tests from Tesla, Netflix earnings
US markets brace for Tesla and Netflix earnings amid rising volatility and delayed inflation data
US markets brace for Tesla and Netflix earnings amid rising volatility and delayed inflation data
– Earnings reports from Tesla and Netflix might affect U.S. stock performance next week amid high inflation concerns.
– Increased market volatility arises from U.S.-China trade tensions and fewer S&P 500 stocks in an uptrend.
The S&P 500 entered its fourth year of growth amidst these fluctuations, having previously experienced a period of calm. Experts suggest market risks are intensifying as valuations reach peak levels.
Market Volatility
Concerns regarding U.S.-China trade relations escalated last week when the U.S. threatened to raise tariffs by November 1 over China’s rare-earth export policies. President Donald Trump is scheduled to meet with President Xi Jinping in two weeks to discuss these issues.
Despite these challenges, major stock indexes gained ground over the week, with the S&P 500 up 13.3% year-to-date. However, a noticeable decline in the number of S&P 500 stocks in an uptrend raises caution among investors about underlying market weaknesses.
The upcoming third-quarter earnings will be closely monitored, especially as the government shutdown halts economic data releases. Companies like Procter & Gamble, Coca-Cola, RTX, and IBM are due to report. The delayed U.S. consumer price index is also expected to provide crucial insights ahead of the Federal Reserve’s monetary policy meeting on October 28-29.
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