The ASX was buoyant today on the back of high hopes on Wall Street that the interest rate cycle is about to peak. At just after midway through the trading day, the local bourse was holding onto the morning’s gains.
All sectors were in the black or green except for Energy (-0.72%) and Materials (-0.51%), which were coming off relatively high five-day gains anyway.
Ironically, given that in the former’s case there is so much at stake for CPI, and in the latter’s case it is considered a volatile stock, Consumer Discretionary (2.15%) and Information Technology (1.99%) were the two best-performing sectors of the day.
This is despite no signs that either the Federal Reserve or the RBA will slow rate rises. Certainly, back home, economists are reckoning on a 0.25% rise, which would take the cash rate to 3.60% – the highest in 11 years.
The Reserve Bank Board of Australia is due to lock in its decision at its 2:30pm (AEDT) meeting tomorrow.
IG analyst Tony Sycamore puts it this way:
The RBA commenced the current rate hiking cycle in May last year to tame spiralling inflation and to cool a tight labour market. Since then, the RBA has delivered a cumulative 325 basis points of rate hikes, including four consecutive 50-basis-point rate rises between July and September.
What is 'expected?'
At its February board meeting, following the release of hotter-than-expected December quarter inflation data, the RBA delivered a 25bp rate hike in conjunction with a hawkish shift as it warned that further interest rate increases were needed over the months ahead.
"The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary."
The RBA also noted that if inflation were allowed to "become entrenched in people's expectations, it would be very costly to reduce later."
The hawkish messaging from the board meeting was then reiterated by RBA Governor Lowe at an appearance before the Senate and House Economics committee in mid-February.
The Australian interest rates market is almost fully priced for a 25bp rate hike this week, and at least two more rate hikes this year, with the RBA's peak rate now at 4.2%.
Since the February board meeting, some preliminary signs have emerged that the economy is slowing, including softer wages, GDP and unemployment data.
Unfortunately, the RBA is unlikely to deviate from its new (hawkish) path until it sees evidence that inflation has begun to ease, possibly in the Q1 2023 inflation numbers released at the end of April.
As a result, our base case is that the RBA's statement on Tuesday will look and sound very similar to the one in February. However, if the words “increases” and “months” were missing it may allow a more dovish tone to emanate from the statement.
In other news
Former Prime Minister Malcolm Turnbull spent today giving evidence at the Robodebt Royal Commission – he’s the second prime minister to appear before the commission as it begins to wrap up its investigation into the failed Centrelink scheme that compelled payment of spurious debt from thousands of some of the most underprivileged Australians dealing with the government agency.
Just as the rest of the world starts the long process of decommissioning coal-fired power stations and transitioning to less dirty forms of energy, China is constructing them at a rate of knots.
New research has shown that last year, following a month of energy supply shortages in 2021, the country added 106 gigawatts of coal-fired power capacity – the equivalent of two large coal power plants per week. This is the largest number the country has permitted in seven years.
The report, jointly released by the Centre for Research on Energy and Clean Air (CREA) and the Global Energy Monitor (GEM), said this coal power capacity coming online now in China was six times that of the rest of the world combined.
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