Squawking hawks

Market review and outlook

After a strong run over recent weeks, global equities pulled back last week under the weight of ongoing hawkish rhetoric from several central banks – as outlined in our new summary table below.

At this stage it appears both the US Federal Reserve and the RBA feel labour markets in each of their countries are too hot for comfort, and some degree of slack – even if not full blown recession – is required. Financial markets, meanwhile, remain hopeful that core inflation and wage growth may slow quickly enough to avoid further untoward rate increases and limit the potential economic downside.

My base case for the moment is that both the Fed and RBA will hike rates again in July.

Of course, we’ll learn more on the inflation front this week with key readings in both Australia and the US. Also worth watching are events in Russia. Initial hopes of an end to the Putin regime were quickly dashed over the weekend, and it seems a case of ‘business as usual’ at this stage. While Russian regime change might ultimately be good for the global economy – lessening geo-political risk – it  obviously depends on who would replace Putin. There’s also the risk of significant short-run instability/uncertainty if and when the regime finally begins to crumble.

 Have a great week!

Top events of the past week Comment
Powell testimony Fed chair reiterated that his base case expectation is two further rate hikes this year.
UK CPI and rates A higher than expected UK inflation result convinces the BOE to hike rates by a larger than expected 0.5%.
US Housing A key US housing index suggests the market is recovering given the decline in yields since late 2022.
RBA Minutes/ Bullock RBA minutes suggest the surprise June rate hike decision was “finely balanced” but it underscored that the Bank remains worried about an upcreep in inflation expectations. RBA Deputy Governor Bullock admits the Bank is effectively targeting a higher UNR rate of around 4.5%, unless inflation drops quickly.
Key events to watch this week Comment
US Inflation The Fed’s preferred inflation measure, the private consumption deflator, is released on Friday (US time) and is likely to show annual core inflation sticky at 4.7%. Barring a downside surprise, likely enough to see the Fed hikes rates in July.
Russia fallout? Will Russia’s political situation stabilise or get more uncertain following the weekend’s apparently failed coup attempt?
Australia May CPI Annual headline monthly inflation is expected to drop from 6.7% to 6.1% helped by lower petrol prices. After lifting last month, annual trimmed mean inflation should also ease back from April’s 6.7% level – but by how much? Low results could encourage the RBA to hold off raising rates in July.

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Written by

David Bassanese

Chief Economist

David is responsible for developing economic insights and portfolio construction strategies for adviser and retail clients. He was previously an economic columnist for The Australian Financial Review and spent several years as a senior economist and interest rate strategist at Bankers Trust and Macquarie Bank. David also held roles at the Commonwealth Treasury and Organisation for Economic Co-operation and Development (OECD) in Paris, France.

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