4 November 2022
Key Points
- RBA hikes rate for the seventh time
- Strong inflationary psychology concerns
- Fed announces 75 basis points increase
- Selloff in China’s debt markets
- Current investment opportunities
Australia
The Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points to 2.85% on Tuesday. It is the seventh rate rise to hit Australian borrowers to quell the country’s strongest inflation in 32 years. The result was widely predicted by the market and analysts, with the RBA deciding to continue the 25-basis point path despite a significant lift in the inflation forecast for 2023 from 4.3% to 4.75%.
Last week, the Australian Bureau of Statistics (ABS) reported the consumer price index (CPI) rose 1.8 per cent in the September quarter to an annual rate of 7.3 per cent, the steepest annual rise in three decades.
During this period of rising inflation, what is most concerning is a strong inflationary psychology becoming entrenched in the Australian psyche. As this develops, businesses become more confident that they can raise their prices; consumers become more accepting of the price rises and see significant wage increases as labour market tightness persists. The Bank for International Settlements puts it in its recent annual report: when inflation is high, it becomes a coordinating mechanism for pricing decisions.
Overall, inflation will remain elevated and poses further pressures on inflation psychology after the Budget papers raised the prospect of a 50% or more increase in electricity prices over 2022 and 2023. Weak business sentiment and the prospect of a red-hot labour market has also added to the inflationary pressures.
Global
The “Federal Reserve” (FED) has announced its fourth consecutive 75 basis points increase to control inflation. In the “Federal Open Market Committee” (FOMC) statement, two points were added, one to highlight the need for contractionary policy for an extended period to remove inflation risks, and another to recognise that the full effect of the tightening of policy takes time to filter through to the wider economy.
The FOMC’s belief that demand is still in excess of supply which leads to persistent inflation risks is expressed in the phrase “in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” This can be seen in the rising consumer prices which are growing at a multiple of the FOMC’s 2.0%yr target, and the near record lows of the unemployment rate and strong nominal wage growth.
The US stock markets rose as the Fed indicated that rate rises would start to slow down but sank as Powell confirmed that further rate rises are expected which could stay high for longer than the Fed had first indicated.
The selloff in China’s debt market is indicative of deeper economic problems and the frustrated efforts to restart the economy. This development also points to the political changes within China and leadership’s shift away from economic growth being a priority. Moreover, the selloff comes as the yuan recently dropped to its lowest level since 2008.
Current Investment Opportunities
With global tightening cycle underway, the Australian economy is emerging as a “safer haven” for bond investors to withstand the challenges of high inflation.
ABE is pleased to announce that we finally have an allocation to Under Armour Inc, after months of monitoring this position. Offering a fixed yield of 6.00% per annum until June 2026, it is a great opportunity to add a globally recognisable brand to your investment portfolio.
Contact us to find out more details.
Copyright © 2022 Australian Bond Exchange Pty. Ltd. (“ABE”). ABE provides both general and specific financial product advice. Unless otherwise stated, any advice contained in this content is of general nature only and any information, advice or recommendation has been provided by ABE without taking account of your objectives, financial situation or needs. Because of this, you should before acting on any information, advice or recommendation from ABE consider the appropriateness of the information, advice or recommendation, having regard to your objectives, financial situation and needs. If this document, or any information, advice, or recommendation, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure document relating to the product and consider the document before making any decision about whether to acquire the product. ABE, its directors, representatives, employees, or related parties may have an interest in any companies or entities, or any financial product issued by companies and entities, and may earn revenue from the sale or purchase of any financial product, referred to in this document or in any information, advice, or recommendation. Neither ABE, nor any of its directors, representatives, employees, or agents, make any representation or warranty as to the reliability, accuracy, or completeness, of this document or any information, advice, or recommendation. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or any information, advice, or recommendation. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a “wholesale client” as that term is defined in the Corporations Act 2001 (Cth). ABE strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. ABE does not make a market in the securities or products that may be referred to in this document