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FIVE at FIVE AU: ASX soars as do interest rates … to nine year highs

Stock Markets Oct 04, 2022 17:00
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The ASX rose sharply today, despite the Reserve Bank of Australia once again hiking interest rates.

The S&P/ASX200 gained 228.50 points or 3.54% to 6,685.40 after setting a new 50-day low.

Over the last five days, the index has gained 2.91%, but is down 10.20% for the last year to date.

It was a sea of green for the sectors.

Energy was 3.88% higher; Materials had the biggest jump of 4.57%; Industrials climbed 2.61%; Consumer Discretionary gained 3.61%; Consumer Staples was 2.49% higher.

Healthcare +2.41%, Financials 3.97%, Information technology 4.26%, Communication Services 1.82%, Utilities 2.84% and Real Estate 3.72% all had good days.

Overall, the ASX added around $78 billion.

It was a good day factoring in the rate rise and the call by Treasurer Jim Chalmers that inflation will worsen.

"They (the Reserve Bank of Australia) have made it clear that they think there is more work to be done by tightening the interest rate," the Treasurer said.

"Our own Treasury forecast expects it will get worse, not better, and will moderate it during the course of next year."

RBA hikes rates to highest level in nine years

Interest rates are now at a nine-year high, with recession becoming a valid talking point.

The Reserve Bank of Australia (RBA) hiked the cash rate 0.25% today but warned of further increases to stem inflation.

This is now the fourth consecutive double rate rise, with rates climbing from the record low 0.1% to sit at 2.6% today.

“Today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down,” RBA governor Philip Lowe said in a statement.

“The board expects to increase interest rates further over the period ahead... The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”

Wealthi economist and co-founder Peter Esho called the move sensible.

“What we’ve seen today is the RBA sending a message that it’s raising rates in a sensible way,” Esho said.

“Inflation is not the only problem, there is also a growing sense that financial stability is important.”

CreditorWatch chief economist Anneke Thompson said, “Global factors have played a key role in today’s decision by RBA, as inflation continues to remain sticky in the US, and currency movements make inflation harder to tame in Australia.

"The US Federal Reserve hiked their interest rates another 75 basis points in September and indicated they won’t stop until inflation is well under control there. This has raised the prospect of recession in the US considerably and resulted in a downbeat mood amongst equity investors.

“Key indicators in Australia remained fairly stable, although there are very early signs of labour force pressures easing. The unemployment rate rose by 0.1% to 3.5%, although the overall number of employed people also increased.

"Job vacancies, however, declined on a seasonally adjusted basis for the first time since the onset of the pandemic. There are now 10,000 fewer jobs available in Australia than three months ago. This is a forward indicator for unemployment, and coupled with increasing labour supply through migration, we may have already witnessed our trough in the unemployment rate.

“Given strong employment has been such a key driver of consumers’ willingness to spend, the RBA will be watching this data closely. If the unemployment rate does continue to ease, the RBA may choose to make more ‘wait and see’ decisions as we move through the remainder of 2022 and into 2023.”

Speaking of recession, the UN Conference on Trade and Development (UNCTAD) has warned against excessive hikes by central banks.

“Excessive monetary tightening could usher in a period of stagnation and economic instability," it said.

“Any belief that they (central banks) will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble.”

The impact of the hike will hurt mortgagees as banks pass on the rise.

“This outcome could see the average variable rate skyrocket to 6.48% or more than double the rate in April, just before the current rate rising cycle began,” Canstar finance analyst Steve Mickenbecker said.

PropTrack senior economist Eleanor Creagh said, “In the period ahead, the level of interest rates will be a key determinant of housing market conditions and the pace and depth of home price falls.

“However, the lagged effect of rate rises, large share of variable rate borrowers ahead on repayments and borrowers on fixed terms yet to expire, means many mortgage holders are only now beginning to feel the impact of the initial rises.”

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