ASX futures point to a downward swing at market open, predicting a 5-point or 0.07% dip, although the ASX24 futures, which include interest rate, equity index and commodity futures, were up 34 points or 0.5% overnight.
US share markets rose yesterday, with the Dow gaining 266 points or 0.8%, the S&P 500 1.3% and the Nasdaq 1.9% or 226 points, as investors processed comments from the US Federal Reserve chair Jerome Powell.
Powell has cited a strong US labour market as a reason for further rate increases, although he also stated he expects 2023 will be a year of “significant declines in inflation”.
Microsoft (NASDAQ:MSFT) gained 4.2% overnight on the reveal of a new version of the Bing internet search engine and Edge browser, powered by the ChatGPT maker OpenAI.
US bond yields fell briefly on news of lowering inflation but hiked higher as Powell suggested more rate increases would be necessary, with 10-year treasury yields gaining 5 points to 3.69% while 2-year yields rose 2 points to 4.47%.
Another 25 bp rate hike
The RBA responded to higher-than-expected inflation and a strong labour market with a fresh rate hike this month, raising interest rates by a further 25 basis points (bp) to 3.35%.
With rates now at their highest levels since 2012, the RBA is flagging more rate rises to come in the coming months, meaning the market’s expectation of a 3.6% terminal rate may be too optimistic.
City Index senior market analyst Matt Simpson thinks further hikes in March and May are likely, based on strong domestic demand.
“Perhaps we’re closer to the elusive pause Dr Lowe teased us with last year, but I see no immediate threat of one in that statement,” Simpson said.
“And whilst the RBA expects CPI to decline as global factors and growth in domestic demands slows, what is going to happen if they do not slow quickly enough? Yep, more hikes.
“For now, a March hike seems like a done deal and I live in hope they hint at a pause, but I will not hang my hat on that given the data overall and strong levels of inflation.”
The market’s attention will now turn to Friday’s quarterly Statement of Monetary Policy (SOMP), which includes the RBA’s revised forecasts.
“The past three reports have seen growth forecasts decelerate and inflation upwardly revised,” Simpson said.
“Given the new monthly annual CPI read rose to 8.1% y/y, and trimmed mean and median inflation beat expectations, there’s a decent chance we’ll see CPI revised higher once more – which in itself could signal another rate hike or two.
“Wage growth has also been revised higher over the past three reports and could be taken as another hawkish cue should it be revised higher for a fourth.”
European markets higher; US dollar weaker
European markets closed higher on Tuesday, with the FTSEurofirst 300 lifting 0.2% and the UK FTSE 100 0.4%.
Energy was the sector with the strongest showing, rising 3% and buoyed by a 8% jump in BHP’s share price, gained from record oil profits in 2022 and a dividend hike.
Banks were up 1.2%, especially BNP Paribas (EPA:BNPP), which gained 2.6% to its share price on higher revenue growth.
Most major currencies were higher against the US dollar at close yesterday:
The euro rose from lows near US$1.0666 to highs near US$1.0761 and was near US$1.0725 at the US close.
The Aussie dollar lifted from lows near US68.86 cents to highs near US69.83 cents and was near US69.50 cents at close.
The Japanese yen followed suit, rising from near 132.32 yen per dollar to about 130.52 yen and hovering near 131.10 yen at market close.
Oil and base metal prices rise
Global oil prices rose 3% overnight, based on easing concerns over interest rate hikes in the US.
The market also took Saudi Arabia’s increase in oil price as a sign the nation believes China will soon raise demand for crude after abandoning its more severe COVID-zero policies.
Brent crude rose 3.3% or US$2.70 to US$82.69 a barrel and US Nymex gained 4.1% or US$3.03 to US$77.14 a barrel. Despite the recent gains, both commodities are sitting at the lower end of their 52-week ranges.
Base metals rose as the greenback fell, with copper futures gaining 1.1%, while aluminium futures lifted 0.1% – buoyed by a possible US tariff on Russian supplies of the metal.
Gold futures also rose 0.3% or US$5.30 to US$1,884.80 an ounce, spot gold was trading near US$1,970 an ounce at US close, and iron ore futures fell 1.3% or US$1.59 to US$122.75 a tonne, weighed down by growing scepticism that China’s property stimulus policies will affect an increase in the demand for steel.