Australian Bond Exchange Weekly Newsletter 15 July 2022
“Invest for the long haul. Don’t get too greedy and don’t get too scared.”
- Shelby M.C. Davis
- June quarter CPI well above forecast
- Record low unemployment
- Central Bankers across the globe increasing official interest rates
The ABS has reported that the June quarter CPI has lifted 2.1% which is well above the market forecast of 1.7%. This was the largest quarterly increase in the CPI since the introduction of the GST in 2000.
The highest increases were new dwellings (5.7%), car fuel (11%) and tertiary education (6.3%). Looking forward, there are a couple of key areas of significant upside risk – ongoing supply disruptions and rising construction input costs together with rising electricity and gas prices.
The unemployment rate also came in with a surprise, which fell to a record low in June of 3.5% which highlights the skill shortages and urgent need for slower growth.
This together with the CPI number is further highlighting the urgency for the RBA to continue to raise cash rates. Some market commentators are suggesting the next move could even be 75bps. The biggest question is at what will be the tipping point before we start seeing some sort of relief to these pressures.
Central Bankers around the world were playing catch up this week and raised official interest rates. The Bank of Korea doubled the margin of its latest rate increases, joining the global wave of larger rate rises, pushing up its rate by 50bps to 2.25% to tame inflation which is at a 23-year high.
The Reserve Bank of New Zealand increased its cash rate to 2.5% and has become the first developed market central bank to push its rate above the neutral level (the point at which monetary policy is neither restrictive nor accommodative). This was the 3rd consecutive 50bps increase.
The Central Bank of Canada also moved its rate up by an astonishing 100bps to 2.5% which highlights how far behind they have fallen in fighting inflation. Like everywhere, the Canadian labour market is tight with record low unemployment and the economy is running too hot.
Everyone is now waiting for the all-important next decision by the US Fed with the market expecting at least another 75bps increase coming shortly.
Government bond rates in the meantime had a relatively calm week with most rates staying in a tight range as most bond market participants already factoring in all these cash rate increases from the Central Bankers around the world.
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