Such is the potentially oversold nature of global equity markets in at least the short-term, stocks managed to surge last week on the day the U.S. Federal Reserve delivered the widely expected 0.5% interest rate increase – merely because Fed chair Powell seemingly ruled out larger 0.75% rate increases at future meetings. Wow, that’s a relief!
Of course, a day later markets saw reason again and slumped. Indeed, the Fed still seems likely to hike rates a further 0.5% at the mid-June meeting and again at the late-July meeting. Friday’s U.S. April payrolls report highlighted the challenges ahead, with continued solid employment growth and a still low unemployment rate of 3.6%. My long-held target of U.S. 10-year bond yields at 3% was achieved, and my anticipated equity market correction continues to drag on. Rising bond yields and a stronger $US have conspired to drag down gold prices in recent weeks, while talk of an EU-wide ban on Russian oil imports (at least by year-end) has seen oil rebound back over US$100/barrel.
So far so bad, but here’s a glimmer of hope markets could latch onto – tentative signs of a peak in wage and potentially even price inflation. Indeed, average hourly earnings on a 3-monthly annualised basis eased back to 3.7% in April, from a recent peak of 6.3% in November last year. Twelve-month growth in earnings dropped from 5.6% to 5.5%.
This Wednesday’s U.S. April consumer price index report is also expected to show an easing back in headline annual inflation from 8.5% to 8.1%, with core annual inflation expected to ease from 6.5% to 6.0%. Of course, this does not mean markets are in the clear – wage and price inflation could still stay stubbornly high. But a market desperate for good news may grab onto it – especially as the Fed won’t be hiking again for another six weeks. Other than the CPI, Wall Street will again face a barrage of Fed speakers – all of whom will unhelpfully share their views on how far and fast rates might need to go.
The RBA duly delivered a rate hike last week, lifting the official cash rate by 0.25% to 0.35%. To my mind, it now seems reasonable to expect a chunky 0.4% hike next month, taking the cash rate to 0.75%. After that, my base case is the RBA will raise rates four further times this year – at 0.25% increments – implying a year-end cash rate of 1.75%.
Despite his spotty record in providing forward guidance, RBA Governor Lowe could not help himself – and is now suggesting a “base case” cash rate target of around 2.5% by end-2023, which is what the RBA now considers as broadly “neutral”. Note markets remain unconvinced, and reckon the cash rate could end this year closer to 2.5% and next year closer to 3.5%. While I can’t see the case for the cash rate to go as high as the market expects (as it would imply a massive slump in home loan affordability), I do note the market has been better than the RBA in predicting the future over the past year – so we must pay it some respect.
That fact the RBA now expects annual underlying inflation to push above 4% in H2’22 and next month’s wage price index could show a marked acceleration in wage growth suggests there’s no obvious catalyst for the market to question its aggressive monetary stance anytime soon.
There’s little key local data this week – a marked slowdown in Q1 retail sales volumes tomorrow is expected after the very strong Q4 ‘re-opening’ bounce back. Wednesday’s consumer confidence report could take a further knock given last week’s RBA rate rise.
In terms of key local market trends, the local market appears finally to have caught up with the global equity correction, with the S&P/ASX 200 failing to break resistance at 7,500. Local bond yields continue to surge higher, though I suspect we must be getting close to a top given the already aggressive rate hikes now priced into the market. China’s renewed lockdowns, meanwhile, have led to a modest correction in iron-ore prices – which together with a surging $US has pushed the $A back down to around US 70c.