Interest rates are now at an 11-year high as the ASX moves lower.
The S&P/ASX200 dropped 71.80 points or 0.99% to 7,144.50, crossing below its 20-day moving average. The index has lost 0.90% for the last five days but has gained 1.50% over the last year to date.
The bottom-performing stocks in this index are ASX Ltd (ASX:ASX) and Brainchip Holdings Ltd down 9.92% and 8.70% respectively.
Nothing else mattered today other than the Reserve Bank of Australia (RBA)’s rate hike, although as evidenced above the ASX is having a difficult time.
RBA provides more pain
The RBA lifted interest rates by another 0.25% today, to a decade high 4.1%.
While some believed the hike to be a shock. It was really a 50-50 call, with wage growth p[laying its part.
RBA governor Dr Phillip Lowe said, "Wages growth has picked up in response to the tight labour market and high inflation", growth in public sector wages is "expected to pick up further" and the annual increase in award wages was "higher than it was last year".
"At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up," he said.
Dr Lowe says the board "remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment."
"Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms."
A further hike isn’t out of the question.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe but that will depend upon how the economy and inflation evolve," Lowe said.
"The board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
"The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."
He said the path to a soft landing was a narrow one, while citing the below-average rate the global economy was expected to grow at over the next couple of years.
What the analysts say
eToro market analyst Josh Gilbert
"The RBA has hiked interest rates to 4.1%, in another surprise to investors and financial markets. The ASX200 fell sharply after the decision, with investors simply not pricing in this much hawkishness from the RBA this year. Last week’s inflation reading would have likely tipped the dial towards another hike, given that if the RBA lets inflation become entrenched, then interest rates will stay higher for longer.
“The key takeaway from this result is that the door is still open for more hikes if required and interest rates may still have further to go, dialling back expectations of rate cuts this year. With inflation still elevated, a turnaround in house prices, a strong labour market and a recent increase to the minimum wage, Governor Philip Lowe has said that further tightening may be ahead.
“The RBA pointed to upside risks with inflation in its statement and with the monthly CPI reading picking up to 6.8%, the central bank is yet to see a clear downtrend in inflation, which is why they have handed down yet another hike.
“The ASX has underperformed against major global markets this year, with the local market clinging to its year-to-date gains. The bad news for investors is that further downside may be ahead as rate-cut expectations begin to dissipate."
Compare Club COO Brendan See
“Regardless of the RBA’s decision today, it’s still set to be a painful second half of the year for any mortgage holders with a fixed term rate that’s due to expire. We’re still seeing around 20% of people looking to refinance coming to us with an LVR (Loan-to-Value ratio) of 80% or more, which locks some homeowners into mortgage prison as they cannot afford to refinance.
“The bigger lenders are pulling cashback offers from the market, and we expect most other lenders to follow suit, so there’s unlikely to be any sweeteners for those households who are about to see a huge jump in their mortgage repayments.
"That’s a worry, especially in states such as NSW, where the average value of a property for homeowners looking to refinance with us with an LVR between 90% and 95% is now over $1 million for the first time. That’s nearly $200,000 more than Victoria and $550,000 more than Queensland and WA.
“We’re also probably close to the top of the rate increase cycle and for those that can hold on, there should be some easing over the next year. It may be tough, but for those households who can hold on, balance their expenses and put in the effort to find a better deal on their household bills, especially their mortgage, can make the savings needed to help to bridge the gap between now and when the cash rates start to fall again.”
CreditorWatch chief economist Anneke Thompson
“Despite clear signs that the Australian economy is well and truly into its necessary slowdown, the RBA today increased the cash rate further, to combat services side inflation.
"Monthly CPI data released in late May showed that April CPI rose by 6.8% on an annual basis. This higher-than-expected rate was driven by housing (+ 8.9%), food and non-alcoholic beverages (+7.9%) and transport (+7.1%).
"There were one-off reasons for the high inflation figure, such as the fuel excise tax being halved in April 2022, that contributed, however, overall, inflation is not falling fast enough for the RBA to be comfortable with.
“The slowdown in labour hiring appears to have started and this will give the RBA some early indications that we should be able to avoid significant wages pressure going forward, despite last week's increase to the minimum wage by 5.75% by the Fair Work Commission. The RBA is also concerned about productivity growth, or the lack thereof over the last three years, and a higher unemployment rate will hopefully help to improve productivity.
“There is still pressure on inflation from the rental market, with housing being the single biggest contributor to the CPI basket. However, the RBA will be aware that a higher cash rate is not the answer to reducing rental increases.
"And while consumer demand is definitely dropping overall, non-mortgaged and non-renting households continue to spend up on services, particularly in the tourism, cafes and restaurants and health sectors, making inflation more sticky in these areas of the economy. It remains to be seen if further increases to the cash rate will make enough of a dent in services side inflation, given these consumers are not impacted by higher interest rates."
Source CreditorWatch.
ASX shares tank
Sharemarket operator ASX Ltd has had a forgettable day, with its shares dropping to 2019 lows.
Shares took a dive on cost and capex blowouts due mainly to CHESS issues.
In fact, the share market has shrunk for the first time since 2005.
Qantas, Woodside and AFL chairman Richard Goyder says it is hard to see the shrinking ASX trend reversing.
He told the AFR, “It’s been a challenging market. The dearth of new IPOs is one thing, obviously private equity and super funds have become much more prevalent.
“There is also increasing rationalisation and consolidation across the resources sector and large international companies, listed elsewhere, entering the Australian market.”
A surge in mergers and acquisitions isn’t helping.
“From a mining perspective, I’m seeing it predominantly in terms of more consolidation, particularly in Australia. The sector is experiencing higher costs and is looking for the benefits of scale,” Investa Property Group chair Rebecca McGrath told the Financial Review on Tuesday.
Data compiled by Refnitiv shows the value of mergers and acquisitions with ASX-listed mining companies has surged to a record $US30.5 billion ($46.2 billion) this year.
“There’s non-traditional players looking at investing further down the value chain to secure access to battery metals to meet the demands of the electric vehicle market over the coming decades,” McGrath said.
”We are seeing mining companies being bought by consortiums or trading houses, battery manufacturers or OEMs (automotive equipment manufacturers) because they are so focussed on getting access to battery minerals.”
“Globally, the demand for energy and base metals is high and the demand to acquire quality assets is as strong as we’ve seen for decades,” she said. “A lot of it is being driven by the energy transition.”
The ASX has a lot of ground to make up.
Its shareholders are not only facing macro winds, but they will also bear the brunt of the CHESS delays.
The cost and capex involved in replacing CHESS must now occur alongside extensive technological upgrades.
"There's just more to do simultaneously," CEO Helen Lofthouse said in Q&A.
Lofthouse put the best spin on things she could saying: “With a strong balance sheet, leading positions in key markets and structural tailwinds, ASX has an attractive core business and we must continue to invest in order to grow and to support the financial markets effectively. We recognise there are near-term, situational challenges that we must address, including our regulatory commitments and our expanded technology modernisation program.
“This is a multi-year investment to secure the foundations for ASX to achieve our full potential and deliver long-term sustainable value for our shareholders, customers and people. Having the right financial settings will support our new five-year strategy, which is designed to ensure ASX can deliver on its purpose of enabling a fair and dynamic marketplace for all.”
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