ASX futures pointed to a slower market today, down as much as 3 points to 6,971 this morning, as investors hold vigil over the US Federal Reserve’s imminent meeting for signs of a slowdown in hikes.
Back home, yesterday’s seventh rate hike in a row takes us to a nine-year high of 2.85% and the RBA shows no sign of retreating from large rate hikes well into the new year.
“The board’s base case remains that interest rates will need to go higher still to bring inflation back to target and our forecasts have been prepared on that basis,” governor Philip Lowe said on Tuesday night.
“We are not on a pre-set path, though. If we need to step up to larger increases again to secure the return of inflation to target, we will do that.
“Similarly, if the situation requires us to hold steady for a while, we will do that. Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”
The Australian dollar was looking a little deflated overnight, trading at 63.97 US cents.
US stocks flat
US stocks closed lower overnight, for the second time in a row, as strong jobs and construction data flattened hopes of a more dovish approach to rates from the US central bank.
The Dow Jones index shed 80 points or 0.2% while the S&P 500 lost around 16 points or 0.4% and the Nasdaq index dropped by 97 points or 0.9%.
'Mega cap' technology stocks fell with Amazon down 5.5%. Shares in Uber soared 12% following the gig economy giant’s strong fourth-quarter profit guidance. Pfizer was up 3.1% on higher sales estimates.
Fed expected to go hard, again
Well, we’ve just done it, and now it’s America’s turn to gulp down the anti-inflation medicine again.
“A 75 basis point (bps) increase appears very much baked in,” said MFS Investment Management chief economist and portfolio manager Erik Weisman.
“The real question: what kind of signalling, if any, will there be for December's rate increase. Another 75 in December would indicate the Fed is nowhere near done. But, a hint at 50 Bps in December might be the sign that the Fed is moving towards greater incrementalism, with a clearer view towards the path to the terminal rate (ie, ‘the pivot’).”
Weisman counselled investors to watch the bank’s timing carefully: “Parsing Fed-speak is never easy but investors should really be looking for anything that indicates more clearly what the terminal rate will be and how quickly we will get there.
“The timing of the done part is important because we can't even begin to think about cuts (into what seems like the most well-telegraphed recession ever) until we have a better understanding of the timing of the peak policy rate.”
While a recession might be in the mail, it’s going to take a while to get there with the lag effect of past increases.
“When will the lag get here, given the relative strength, and do investors, politicians and financial punditry have the patience to wait it out?” Weisman asked.
“As of now, the locomotive might be about to jump the tracks but the bar car is still serving drinks and the dancing continues in the caboose.”
In other news
Global oil prices were up by around 2% yesterday as investors bet on China’s ongoing COVID-19 restrictions easing.
Brent crude rose by US$1.84 or 2% to US$94.65 a barrel, while US Nymex crude was up US$1.84 or 2.1% to US$88.37 a barrel.
Base metal prices rose yesterday, with nickel leading the charge, up 8.3%. Other metals rose in the more modest range of 0.5 to 1.9%.
Gold futures rose by US$9.00 an ounce or 0.5% to US$1,649.70 an ounce, while spot gold was trading near US$1,650 an ounce at the US close.
Iron ore futures rose by US$2.25 or 2.9% to US$80.03. Before the latest monthly rollover of the futures contract, iron ore had traded at US92.43 a tonne.