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Post Market Wrap | RBA says inflation has increased in many parts of the world

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Resilient economy and low unemployment likely to push inflation higher in coming months. 
  • 10-year bond yield hits 6 year high at 2.96 percent.
  • Investors should brace for higher RBA interest rates this year.  

RBA on hold … for now

The Reserve Bank of Australia (RBA) at its April 5 Board meeting decided to leave the official cash rate unchanged at 0.1 percent. It has been at this level since November 2020, when the RBA reduced the official rate in anticipation of an economic slump resulting from enforced lockdowns arising from the COVID pandemic.  

The RBA indicated that it is closely monitoring emerging inflationary pressures in determining the timing around an increase to the official cash rate. The RBA noted that supply chain disruption has led to shortages of goods and materials, resulting in higher input costs. The Bank is also cognisant of the inflationary impact of soaring petrol prices. Rising house purchase costs and grocery inflation related to flood damaged crops, are other factors contributing to the rising inflationary outlook. The potential for higher inflation is exacerbated by the tight labour market that may see higher wages, adding further pressure to input costs. The latest ANZ monthly job advertisement survey pointed out that job ads are at a 13 year high. The survey supports the RBA’s forecast that unemployment will fall below 4 percent this year and remain low into next year. The Federal budget papers go further and have forecasted unemployment to remain below 4 percent for the next 3 years. Australia hasn’t experienced this level of unemployment for 48 years! 

The RBA observed in its April 5 statement that periods of low unemployment correlate with an increase in real wages, implying wage increases at a rate above the inflation rate. This prospect has elevated the inflationary concerns shared by the RBA Board.  

The inflation outlook is further complicated by the $8.6 billion cost of living relief package announced in the Federal Budget, at a time when the economy is already performing strongly. The cash injection is aimed at low to middle-income workers, who tend to spend any money received. 

The Australian economy is strong

The RBA’s announcement referred to the strength of the Australian economy following an easing of forced lockdowns introduced at the onset of the Omicron variant. The Bank also stated that household and business balance sheets are strong, and the construction work backlog is supporting employment growth. 

The RBA acknowledged that while inflation is increasing in Australia, it is less than the level in other countries. According to the RBA, underlying inflation in Australia is 2.6 percent, while the headline rate is 3.5 percent. The RBA will publish its revised inflation forecasts in May and has recently stated it expects annual headline inflation to exceed 4 percent in the months ahead. 

The impact of higher interest rates is more readily absorbed by the economy during periods of strong employment and wages growth, than in times of a weakening economy. Moderately higher interest rates at this stage of the economic cycle, should enable economic growth to be sustained at a rate consistent with near full employment, without embedded consumer price inflation, that may generate a wages spiral. This implies that an interest rate rise in the near term should have a less adverse outcome for investment markets and households, than if left until inflation is entrenched within the economy.

A strong domestic economy has given the RBA grounds to respond to an expected acceleration in the rate of inflation in the period ahead. The response will be an increase in interest rates. The question is – when, and by how much?       

Investment Implications 

RBA interest rate policy is determined by underlying inflationary expectations and not the headline inflation rate. Interestingly, the 10-year bond rate is widely considered to be a useful pointer to the direction of future interest rates. This is because bond market participants on both sides of the trade must agree a bond price that reflects the direction and quantum of the interest rate (yield) payable over the duration of the bond. Accordingly, trends in long-dated bond yields represent the real-time collective wisdom of bond market participants, making changes in long-dated bond yields a useful marker that illustrates where interest rates may be headed.    

The Australian Government 10-year bond yield has been steadily rising in recent months. The 10-year bond yield rose to 2.95 percent today, well up from 1.67 percent on 1 January 2022. The message from the Australian bond market is clear -Australian interest rates are set to move higher, on the back of higher inflation. 

The forecast continuing low level of unemployment below 4 percent, strong economic growth forecasts, and emerging signs of inflation, all indicate the need for historically low interest rates no longer exists.

The evidence suggests that the RBA is likely to announce higher interest rates soon. This may occur in June after the RBA’s revised inflation forecasts are announced in May.  

A major implication of higher interest rates for investors is the impact on equity and property valuations. The all-time low interest rate environment has supported equity and property valuations for a lengthy period. 

In response to a changing interest rate environment, now is the time for investors to evaluate their portfolio in terms of withstanding the headwinds likely to accompany a gradually increasing cost of money over the coming 12-18 months.

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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Debt limit dispute: Will America default?

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Can U.S. lawmakers agree on the debt limit before the fast approaching deadline to avoid default?

 
The executive branch and Congress are trying to strike a deal about the debt limit as the country marches closer to defaulting.

But can President Joe Biden and Republicans come to an agreement on fiscal policy in time?

The federal government could run out of money as early as June 1. Without borrowing more there is a risk that the United States will begin defaulting on its financial obligations.

Negotiations between Speaker Kevin McCarthy and President Joe Biden at the White House continue as lawmakers are staring down a swiftly approaching deadline.

The Treasury has been warning that the government would likely default on some bills in June if Congress does not raise the debt ceiling.

Democrats have insisted on raising the debt limit without preconditions. But Republicans say President Biden and the Democrats are playing Russian roulette with America’s economy after a two-year spending binge that brought 40-year high inflation and pushed the nation’s debt to over $31-trillion.

While both sides have agreed that action is needed to reduce the deficit—each have extremely different ideas about how to do it.

Republicans are looking to cut spending levels, while Democrats have called to increase tax revenue from the ultra-wealthy and large corporations.

So, can Washington D.C. politicians broker a deal and prevent the American economy from falling off a cliff?

Mitch Roschelle, Managing Director at Madison Ventures and a Visiting Research Fellow at the University of San Diego School of Business joined us to discuss. #U.S. Politics #Mitch Roschelle #debt ceiling #Capitol Hill #Washington D.C.

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Qantas leadership change takes full flight as airfares skyrocket

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The next CEO of Australia’s high-profile airline, Qantas has a huge task ahead

After the long reign of her predecessor Alan Joyce, Vanessa Hudson inherits an airline with some key challenges ahead.

The challenges facing any CEO at the moment are high. Rising costs, tough competition, and cash-strapped customers are all part of the package when it comes to running an airline.

Qantas is one of the world’s most famous airlines.

At the height of the pandemic, the company’s results see-sawed.

However, it survived in part due to the actions of CEO Alan Joyce, and his right-hand CFO Vanessa Hudson.

Now, Alan Joyce is stepping down and Vanessa Hudson beat a field of 40 contenders for his job.

While Alan Joyce kept shareholders happy in recent times, some analysts believe he skimped on capital expenditure, leaving a multi-billion dollar hit to the new CEO.

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Why aren’t more U.S. banks failing?

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The U.S. has witnessed one of the biggest bubbles of the past 100 years

 
Three U.S. banks have collapsed in a matter of months.

It could spell trouble for the world’s biggest economy as inflation soars.

It is part of a phenomenon known as an economic bubble, where current asset prices exceed their intrinsic valuation.

Silicon Valley Bank and Signature Bank are among those to fall apart.

Gregory Becker is the former CEO of the collapsed SVB, who says he’s “truly sorry” for what’s happened.

He says the bank was responsive to regulator concerns about managing risk and working to address issues.

Governments are grappling with the most rapid increase in interest rates across four decades. #featured #business #politics #banking

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