The ASX is set to fall today. ASX 200 futures are trading 13 points lower, down -0.18% as of 8:20 am AEST.
Yesterday, the ASX200 finished 12 points (-0.16%) lower at 7,118, dragged down by Energy (-0.72%), Financial (-0.66%) and Real Estate (-0.38%) sectors. On the upside were Consumer Discretionary (+0.81%), IT (0.57%) and Health Care (+0.42%) sectors.
“The ASX200 gave up 35 points of early gains yesterday after the hawkish tones accompanying Tuesday’s RBA rate hike were reiterated in the RBA Governor’s speech at the Morgan Stanley (NYSE:NYSE:MS) Australia Summit,” writes IG analyst Tony Sycamore.
“The RBA’s emphasis on inflation risks, particularly around expectations, wages and poor productivity, now has the rates market pricing up a full 25bp rate hike to 4.35% by September.
"A higher RBA cash rate into slowing growth (Q1 2023 GDP printed at just 0.2% for an annual rate of 2.3%) is a toxic recipe for equities that were expecting an RBA peak rate just above 4% just yesterday.”
ABS head of National Accounts Katherine Keenan said: “This is the sixth straight rise in quarterly GDP but the slowest growth since the COVID-19 Delta lockdowns in September quarter 2021."
Overseas we saw mixed results, with the rotation out of mega tech (Nasdaq -1.75%) and into the small-cap cyclical Russel 2000 (+1.78%) continuing.
Sycamore says the US could also be factoring in another rate hike even though there is a lack of key data due until next Tuesday’s inflation data is released. He says the market pricing for a 25bp rate hike at next Thursday’s FOMC meeting increased to 30%.
“The US rates market reconsidered its dovish pricing after the RBA’s rate hike earlier this week was followed by the Bank of Canada (BoC) overnight,” Sycamore said.
“After the BoC paused at its last two meetings, a 25bp hike (to 4.75%) was 50% priced ahead of last night's meeting. The BoC’s commentary on inflation and excess demand suggests more hikes to follow.”
The Bank of Canada noted that Canadian consumption growth in the first quarter was “surprisingly strong and broad-based”.
It highlighted a tight labour market and that the housing market had picked up despite higher mortgage rates.
"Monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to (its) two per cent target.
“Overall, excess demand in the economy looks to be more persistent than anticipated,” the BoC stated.
Here’s what we saw (source Commsec):
US markets
Were mixed on Wednesday. Weighing on stocks were higher US bond yields, lifting in response to the surprise Canadian rate hike.
Technology stocks fell, but the small-cap Russell 2000 index rose by 1.8%. The energy index rose 2.7% in response to a higher oil price. The KBW Regional Banking index rose by 3.4% to a 2-month high. The Dow Jones index closed up by 93 points or 0.3%. The S&P 500 index fell by 0.4%. The Nasdaq index fell by 171.5 points or 1.3%.
Analysts cited rotation out of tech stocks for the decline in the S&P 500 and Nasdaq indexes.
European markets
Closed modestly lower on Wednesday with healthcare stocks leading declines, down 1.4%.
Retail stocks lifted 2%, with oil & gas up 1% and banks up 0.7%. Data showed that German industrial output rose by 0.3% in April, less than the expected 0.6% gain.
News of a 7.5% annual decline in Chinese exports in May weighed on sentiment for stocks dependent on the broader global economy.
The continent-wide FTSEurofirst 300 index fell by 0.2%. And the UK FTSE 100 index eased by just 0.1%.
Currencies
Were mixed against the US dollar in European and US trade.
- The Euro rose from US$1.0665 to US$1.0740 and was near US$1.0700 at the US close.
- The Aussie dollar fell from highs near US67.17 cents to US66.40 cents and was near US66.55 cents at the US close.
- The Japanese yen eased from 139.03 yen per US dollar to JPY140.20 and was near JPY140.15 at the US close.
Global oil prices rose on Wednesday. US crude stocks fell by about 450,000 barrels in the past week, according to data from the Energy Information Administration, compared with estimates for a 1 million barrel lift in stocks.
- The Brent crude price rose by US66 cents or 0.9% to US$76.95 a barrel.
- The US Nymex crude price rose by US79 cents or 1.1% to US$72.53 a barrel.
- Copper futures ended lower by just 0.3% but aluminium futures edged up 0.1%.
- Zinc rose 3.3% while nickel rose 2.2%.
- The gold futures price fell by US$23.10 or 1.2% to US$1,958.40 an ounce.
- Spot gold was trading near US$1,940 an ounce at the US close.
- Iron ore futures added US59 cents or 0.5% to US$109.18 a tonne.
The fight against inflation is now causing real issues for homeowners, renters and business owners.
EY chief economist Cherelle Murphy has warned that Australia is now at an ugly point in the business cycle. Murphy says that where we have falling growth, prices and labour costs have risen but 12 rate hikes since May 2022 are yet to change the inflation dynamics.
"The economy is digesting the Reserve Bank’s rate hikes but has not yet felt the relief from them," she said.
"Even though prices are not rising as quickly as at the end of last year, they are still moving up too fast. The National Accounts revealed that the prices of services are still accelerating for households. The cost of employees for businesses is rising because wage growth is rising, and labour productivity is falling."
Notably, governor Phillip Lowe partly blamed the Fair Work Commission’s decision to lift minimum award wages by 5.75% on the latest hike.
Many economists now believe the cash rate will peak at 4.85%.
The CBA says RBA peak rate forecast is 4.35pc, while Goldman Sachs (NYSE:NYSE:GS) and Capital Economics has it at 4.85%.