“To get rich, you have to be making money while you’re asleep.”
- David Bailey
Key Points
- Australian RBA lifts rates aggressively
- Commodity prices across the board are falling strongly
- Strikes in Europe in key energy industries
- Euro Dollar falls to multi-decade low
Australia
As expected, the RBA increased official interest rates by 50bps bringing the official cash rate up to 1.35%. This is still way behind what the bond market has already priced in for some time. However, it clearly signals to the market and the economy that the Central Bank is determined to fight inflation and we have seen a meaningful fall in government bond yields for the first time. The 10y government bond yield fell from 4.20% down to 3.40% and the 5y bonds moved from 3.95% to currently 3.20%.
In response, faster than most, we also raised our cash deposit rate to match.
These increases were way overdue, and most market observers are expecting an additional 50bps increase at the RBA’s next meeting in August which will bring the official rates closer to the neutral zone around 2%.
The banks were very quick to pass these increases on and the average mortgage rates are moving closer to 5%, which has started to impact house prices and consumer confidence. It will be very interesting to see in the next couple of weeks what company boards are thinking in the upcoming profit reporting season. In particular, the forward guidance and outlook will be closely watched.
Global
Commodity prices across the board are falling strongly which is excellent news for input costs and lower inflation. The copper price, which is the major industrial metal, has fallen by almost 20% and US Wheat prices are down around 30%. We have seen some stabilisation of the all-important oil price which at least has stopped going up and has been trading in a range between US$100 and SU$120 for the past couple of months. All this is excellent news for lower inflation and is a strong indicator that the global economy is slowing down.
Clearly, Europe has the biggest issues with energy supply and costs, with stories emerging daily that Russia is reducing its supply of gas to the continent. In addition, there is news emerging of strikes by workers in France in their all-important nuclear power plants as well as possible strikes in the Norwegian oil and gas industry which makes the situation even more complicated.
It is no surprise that the Eurozone Sentix investor confidence survey fell strongly (-25%) and the Euro Dollar also fell back to a multi-decade low and is now trading close to parity to the US$ (down 20% in the past 12 months).
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