Australian Bond Exchange Weekly Newsletter
2 September 2022
“Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations” – Chairman Paul Volcker, 1979
Key Points
- Fed’s message triggers sharp falls in equities
- RBA set to tighten cash rate by 50 basis points
- China continues to face widespread droughts
- Current investment opportunities
Highlight
Fed’s message triggers sharp falls in equities
At the Jackson Hole Symposium of 2022, FOMC Chair Powell delivered a stern commitment to halting inflation, warning that he expects the central bank to continue raising interest rates in a way that will cause “some pain” to the U.S. economy.
Powell has stated that the Fed will continue to take “forceful and rapid steps” to bring down inflation and that “we will keep at it until we are confident the job is done.” The FOMC is expected to raise the Fed Funds target rate by 50bp at each of the remaining meetings in 2022, bringing the target rate to 3.75% – 4%.
“While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said in prepared remarks. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
The Fed’s hawkish message from Jackson Hole continues to sink in, triggering sharp falls in US equity markets (S&P500 -3.37%) and sending AUDUSD sub 69c.
Australia
Interest rate update
According to Westpac’s Chief Economist, Bill Evans, the RBA is set to tighten a further 50 basis points next week when the Reserve Bank Board meets on September 6. The 50 basis points would move the cash rate to 2.35% and into the “neutral zone.”
The RBA’s monetary policy over the last four months has quickly moved the cash rate into the neutral zone (225 basis points in four months – five meetings). It is expected the Board will decide to bring down the pace of increases to 25 basis points from the October meeting.
Consecutive 25 basis point increments are expected to extend out to February 2023, which will see the cash rate peaking at 3.35%. At this point, it is expected that the Australian economy will slow down as rate hikes and high inflation is felt by households and business.
The RBA’s role in maintaining the cash rate at 3.35% through 2023 is a necessary condition for the Bank to bring down the rate of inflation to the 3% target.
Global
China’s widespread droughts
China continues to face widespread droughts, forest fires and heatwave with the threat of droughts far reaching for economies, individuals and investment portfolios.
The world’s second largest economy relies on rainfall and water sources to grow its agricultural products, supply its hydroelectric generators and power manufacturing and processing plants across the country.
The government is also facing a battle on multiple fronts such as a severe slowdown and potential crisis of the property crisis and ongoing Zero COVID policy that impacts on consumer willingness to take on debt and invest in property.
Current Investment Opportunities
You can also still invest in the 5.5% fixed coupon bond linked over Rolls Royce Holdings PLC and Sydney Airport CPI linked bond.
Australian Bond Exchange is still considering Under Armour and keeping an eye on when the price is in our favour.
Contact us if you have any questions or would like any assistance.
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