The Australian stock market has raised the green flag for the first time in a week, backed by broad gains in energy and materials.
Even cryptocurrencies steadied but it looks like more pain is on the horizon for cypto holders.
The S&P/ASX200 gained 81.40 points or 1.27% to 6,514.80 after setting a new 52-week low. Over the last five days, the index has lost 2.56% and 9.96% over the last 52 weeks.
Top-performing stocks were Pointsbet Holdings Ltd up 9.41% and Paladin Energy Ltd (ASX:PDN) up 7.08%.
While it has been a better day, there is still a feeling that things will get worse before improving as inflation and interest rates continue to scare investors.
Inflation to get worse
Federal Treasurer Jim Chalmers has warned inflationary pressures will likely get worse.
"The expectation across the board is that inflation will get worse before it gets better and that interest rates will get higher as well," Chalmers said.
When asked if it will exceed 7%, Chalmers said, "it remains to be seen… the expectation across the board is that inflation will get significantly higher than the 5.1% that we saw in the March quarter."
He acknowledged life was currently difficult for Australians but said these weren’t problems to be swept under the carpet.
"We can’t just pretend away these big challenges that we confront in the next six or 12 months in particular.
"It is possible to be optimistic about the future of our economy and country while also recognising we have to navigate together are really tricky, difficult combination of circumstances.
"That is our objective."
One point of attack will be to give the Australian Competition and Consumer Commission (ACCC) a more powerful monitoring role to help stamp out “dodgy behaviour”.
"We won’t tolerate dodgy behaviour when it comes to pressing in energy markets. There is enough inflation and energy," he said.
"There is an important role for the regulators here, they have been exercising their role I think with a degree of professionalism."
Is Australia facing a recession?
According to Deutsche Bank Australia chief economist Phil O’donaghoe, Australia is facing a 2023 recession, suggesting the cash rate will reach 3.1%. A rate rise of that magnitude will have a flow-on effect for unemployment, which O’donaghoe says could rise by 1%.
"That increase in unemployment, if realised, will be enough for us to call a recession in 2023, and will likely prompt the RBA to begin easing in Q4-2023,"
O’donaghoe says the Reserve Bank of Australia’s contractionary policy stance will lead to an unemployment rate of 4.75% by the end of 2023.
"That is similar to the policy-induced recession seen in Australia in 2000," he says.
Meanwhile, the RBA released its June minutes, talking up further steps to normalise monetary conditions, with Governor Phillip Lowe rejecting claims of a recession.
The minutes show that the size and timing of future interest rate increases will continue to be guided by incoming data and the board’s assessment of inflation and the labour market.
"The board remains committed to doing what is necessary to ensure that inflation in Australia returns to the target over time," the minutes report.
The RBA had considered a 25-basis point spike in June, however opted for a 50 basis point hike which still left the cash rate at below 1%, which it said would still be "highly stimulatory, and that further increases would be required".
The RBA argued that interest rates were still low, even with the rise, particularly for an economy with a tight labour market and rising inflation.
The inflation mindset is shifting.
"Firms had become more willing to pass on cost increases to consumers and, in a tight labour market, employees were demanding higher wages as compensation for higher living costs. In such an environment, there is a heightened risk of persistently high inflation, especially if expectations of higher inflation become entrenched," the minutes said.
"If that were to occur, the task of returning inflation to the target would become more difficult and come at a higher cost in terms of lower levels of economic activity and employment. Raising the cash rate by 50 basis points at the current meeting would help to mitigate this risk."
On the recession front Lowe said, “I don’t see a recession on the horizon here.
"At the moment the unemployment rate is the lowest in 50 years. The participation rate is the highest ever. There are more working Australians who have jobs than ever before. Households have strong balance sheets. Our terms of trade are at the highest ever, which is really boosting our national income," he said.
"But if the last two years have taught us anything, it’s that you can’t rule anything out.
On the small cap front
- Recce Pharmaceuticals Ltd finished 15.04% higher.
- Caspin Resources Ltd finished 12.08% higher.
- Anteris Technologies Ltd finished 9.28% higher.
- Race Oncology Ltd finished 8.91% higher.
- Future Metals NL finished 6.66% higher.
- Hawsons Iron Ltd finished 6.09% higher.
- Sunstone Metals Ltd finished 5.26% higher.
- Moho Resources Ltd finished 3.70% higher.
- Golden Rim Resources Ltd finished 1.31% higher.