Bassanese Bites: RBA to hike 0.5% – September 05 2022
Week in review
Global equities retreated further last week and bond yields rose as the very hawkish speech by Fed chair Powell from the previous Friday continued to cast a long shadow. Most Fed speakers continued to talk of the need to raise rates aggressively to bring down inflation even in the face of recession risks. At this stage it still seems likely the Fed will hike rates a further 0.75% at the upcoming September 20-21 policy meeting.
Accordingly, markets are unsure how to interpret incoming US activity data – is it good or bad news, for example, if the economy remains resilient or shows signs of tipping into recession? Strong growth (such as US payrolls on Friday) only raises the risk of even more aggressive Fed rate hikes, while signs of slowing growth (as in the housing sector) lessen interest rate risk but increase corporate earnings risk.
The one unambiguous economic reading at present is inflation – if US inflation shows signs of falling quickly (and there are tentative signs that it might), that would clearly be a positive for both bond and equity markets. The next important US inflation report is the CPI next Tuesday, September 13.
Non-US developments are also hardly market-supportive – with Russia shutting off gas supplies to Europe over the weekend for ‘maintenance’ purposes, and China persisting with locking down cities when and if COVID cases appear.
As evident in the chart set below, US 10-year bond yields and the US dollar have re-touched their highs for the year even as oil prices head lower. US stocks have given back roughly half their rally since mid-June.
