Weekly market update - 7th of November 2022
Written and accurate as at: Nov 07, 2022 Current Stats & Facts
Central bankers continue to hog the spotlight. +75 b.p. in the US (to 3.75-4.00%) with the Fed Chair highlighting that whilst the pace of tightening may slow there is 'still some ways to go', and that peak rates are likely higher than earlier expected. He also stated that he would prefer to over-tighten and need to back off than not go high enough or for long enough, and allow inflation to become more entrenched. Now not so much about how fast, but rather how high and for how long....
BoE raises rates by 75 b.p. to 3.0%, flags that unlikely to see economic growth resume until at least 2024, expects inflation to start easing mid-2023, and tells financial markets they have over-estimated likely peak rates.
And finally, the RBA, added another 25 b.p. to 2.85%, despite the recent overshoot on inflation. Preferring regular, smaller increments from here it seems as it assesses the lagged impact of rate rises to date and faces an uncertain outlook. Inflation is now expected to peak at around 8% by the end of 2022, ease to 4.75% for the year ended Dec-23, and remain above-targeted levels right through 2024.
The S&P/ASX 200 was up 1.6% for the week, with Resources +3.5% v Industrials +0.9%. S&P 500 -3.3%, although +1.4% on Friday. Speculation of a pivot out of China regarding its Covid zero policy saw strong rises in commodity prices.
Key Market Drivers:
- As expected, US Fed raised rates by 75 bp for a fourth straight time, taking the funds rate to
3.75-4.0%. Statement leaned dovish, noting that FOMC will take cumulative tightening to date
and lagged effect with which monetary policy works into consideration when it comes to
additional tightening. The initial market reaction upon the release of the statement was positive. - However, in his press conference Chair, Powell leaned more decidedly hawkish, flagging the
outsized importance of determining how high to go and how long to stay there. He flagged a
likely higher terminal rate than seen in the September dot plot. - Whilst suggesting that the time to slow hikes could come as early as December, Powell noted
that "It is very premature, in my view, to think about or be talking about pausing our rate hikes.
We have a ways to go.” A still tight labour market was highlighted, as was resilient consumer
demand, underpinned by strong household balance sheets. - Whilst pointing out that the window for a soft landing has narrowed, Chair Powell explicitly
stated that he would prefer to overtighten, and have to subsequently back off, then allow
inflation to become more entrenched. He provided a reminder that the Fed has powerful tools
to support economic activity in that case, as it is shown in the past. - Despite the recent inflation overshoot, the RBA maintained its slower tightening pace, raising
rates by 25 b.p. to 2.85%. RBA justified slowing the pace of hikes in recent meetings given there
are lags to policy and the economic outlook is uncertain, as well as the fact that "drawing out
policy adjustments also helps to keep public attention focused for a longer period on the Board’s
resolve to return inflation to target." The hurdle for a return to 50 b.p. hikes seemingly appears high. - Speculation about China preparing for some kind of pivot on zero Covid. However, still no official
confirmation and lots of scepticism about the potential for a meaningful shift given the
messaging out of the recent party congress and the imposition of restrictions with the ramp in
cases. Commodity prices were substantially higher Friday night.
Macro / Economic newsflow:
- The RBA's central scenario forecasts contained few surprises. Headline inflation forecasts were
upgraded to now peak at an annualised 8.0% in Dec-22 (7.75% previously), before easing to
4.75% Dec-23 (4.25% previous) in Dec-23, 3.25% (previously 3.00%) for the year ended Dec-24. - Central GDP growth forecasts are for a 3.6% growth rate for the year ending June 22 to
moderate to 2.0% for the year ended Jun-23 (previous forecast 2.25%) and 1.50% to Jun-24. - These RBA forecasts are based on the technical assumption that the cash rate ‘peaks at around
3.5% in mid-2023 before easing back to around 3% by the end of 2024’. - Australian capital-city dwelling prices fell -1.1% mom in October, representing a slight easing in
the pace of decline relative to September. Brisbane -2.0%, Sydney -1.3%, Melbourne -0.8%,
Perth -0.2%. In levels terms, capital-city dwelling prices are now -6.5% below their peak in April
2022, albeit still +16.5% above their pre-COVID level. - Residential building approvals fell -5.8% mom in September, relative to consensus expectations
for a -10.0% decline. The decline was broad-based across detached houses (-7.5% mom) and
higher-density dwellings (-3.1% mom). Approvals remain ~30% below the peak in early 2021. - Owner-occupier housing finance approvals -9.3% mom in September (-19.9% yoy). First home
buyer loan activity -26.0% yoy. Investor approvals -6.0% mom (-15.3% yoy). Total housing
finance approvals are still above pre-COVID levels but ~25% below the early 2022 peak. - Australian retail sales +0.6% mom in September, +17.9% yoy. Nominal retail sales (ex-food)
+0.4% mom, +28.9% yoy. Sales of food +1.0% mom, +4.0% yoy. - The BoE upped its benchmark rate by 0.75% to 3.0%, its eighth successive increase. That pushed the rate to its highest in 14 years. Seven members voted for it, two preferred a smaller increase.
- The BoE warned that Britain faced a ‘recession for a prolonged period’, with the economy unlikely to start growing again until at least mid-2024. Inflation is expected to start easing from the middle of next year. The Monetary Policy Committee suggested that financial markets were
likely overestimating how high-interest rates would go.
Domestic Sector Performance:
- Outperforming Sectors: Energy +5.0%, Utilities +3.6%, Materials +2.6%, Information Technology
+2.6%, Consumer Discretionary +1.8%, Communication Services +1.6% - Underperforming Sectors: REITs -0.5%, Consumer Staples -0.2%, Health Care +0.4%, Financials +0.9%, Industrials +1.4%
