The ASX is likely to be flat today as investors brace for another rate rise and ply their money into Melbourne Cup betting outlets.
We’re expecting a rise of 0.25% in the cash rate – the seventh straight rise in a row.
Over on Wall St, stocks ended the month on a down note, even though the Dow Jones Industrial Average logged one of its strongest monthly performances of all time.
The Dow recorded its biggest October gain on record as investors await the outcome of this week's Federal Reserve meeting, which will indicate the size of the Fed’s next rate rise.
The Dow ended October down 0.39%, to close near 32,733, but posted a monthly gain of 13.95%, its strongest since January 1976.
The S&P 500 fell 0.75% to close near 3,872, logging a monthly rise of 8%.
The Nasdaq Composite COMP lost 1.03% ending near 10,988, leaving it up 3.9% in October.
Here’s what we saw (source Commsec):
- The Euro fell from US$0.9960 to US$0.9870 and was near US$0.9880 at the US close.
- The Aussie dollar fell from highs near US64.25 cents to lows near US63.70 cents and was near US63.95 cents at the US close.
- The Japanese yen eased from 147.75 yen per US dollar to JPY148.85 and was near JPY148.70 at US close.
- Global oil prices fell on Monday.
- “Data showed that US oil output climbed to nearly 12 million barrels per day in August, the highest since the onset of the COVID-19 pandemic. At the same time there were fresh Covid-19 restrictions in China. And data showed that Chinese manufacturing and services sector activity declined in October. US President Biden will make a statement on high oil prices later on Monday,” Commsec’s Craig James noted.
- The Brent crude oil price fell by US94 cents or 1.0% to US$94.83 a barrel.
- The US Nymex crude oil price lost US$1.37 or 1.6% to US$86.53 a barrel.
- Base metal prices fell on Monday by between 1.3% and 4.2% with zinc down the most.
- Aluminium bucked the trend, up 0.7%.
- The gold futures price fell by US$4.10 an ounce or 0.2% to US$1,640.70 an ounce.
- Spot gold was trading near US$1,633 an ounce at the US close.
- Iron ore futures fell by US58 cents or 0.6% to US92.43 a tonne.
Consumer confidence dips further
According to an ANZ-Roy Morgan survey, inflation expectations have surged, after hotter than expected third quarter consumer price index.
Weekly inflation expectations have now surged 0.5% to 6.6% – the highest point since February 2011.
“Cost of living concerns, along with expectations of more rate hikes by the RBA, have caused confidence to decline to levels last seen during the early weeks of the COVID lockdowns,” said ANZ’s head of Australian economics, David Plank.
“The continued decline in confidence seems to finally be having some impact on spending.”
Could we see a 0.5% rise today?
The National Australia Bank doesn’t think it’s out of the question.
While the majority of the bank’s forecasters are predicting a 0.25% rise in the cash rate, markets are pricing in a 22% chance of a bigger number.
“Although NAB has pencilled in a 25bp hike, we also think there is a real risk that the RBA hikes by 50bps, and that this risk is higher than the 22 per cent chance that markets are currently pricing,” NAB economists wrote this morning.
ANZ remains steadfast on 0.25% rise.
“While a 50bp rise today is possible, we expect the RBA Board to stick with a 25bp hike, rather than reverse the judgment it made at its October meeting about scaling back the size of rate increases,” ANZ economists said.
Inflation outlook improves
JP Morgan strategists are bullish on inflation improving.
“More dovish rhetoric from the ECB, BoC, Fed and RBA recently indicate the pace of central bank tightening is likely to slow in the coming months, though it is early to assess whether this means a lower terminal rate,” JP Morgan wrote.
“The Equity Risk Premium is still hefty, despite the rise in interest rates this year, underpinning our cautious optimism on risk assets.”
The investment bank believes we are entering a phase of disinflation, with bond yields to peak out.
“We believe that the disinflation phase has already begun, and that inflation prints will be meaningfully lower in three-six months’ time. At present, it is goods prices inflation that is rolling over.
“Most companies that are currently providing adverse earnings guidance are highlighting weaker demand/poor macro backdrop and already the corporate pricing power indicator has come off nicely. Even though services prices are stickier, we suspect that they too could be rolling over soon.”
Analysts at the bank believe the labour market will weaken.
“Finally, as economic activity has weakened closer to contraction territory, bond yields are likely to be capped by growth. Bond yields peaking could go a long way in helping the equity market stabilise,” the bank wrote.