The ASX is expected to sink slightly today, with ASX 200 futures down 0.3% after the US session ended.
The day saw the US Federal Reserve lift rates to 16-year highs after a tenth straight 25 basis points hike as it looks to curtail inflation.
Chairman Jerome Powell remains optimistic that a recession can be avoided, however he did say, “I continue to think it’s possible”.
In what could be a positive sign for US mortgagees, Powell eliminated language about future hikes. However, cuts will be some time away.
"Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go," Powell stated.
Commenting on the Fed's decision, Greg Wilensky, Head of US Fixed Income at Janus Henderson Investors said: “The Federal Open Market Committee’s (FOMC) 25 basis-point hike today was broadly in line with market expectations.
“Notably, the Fed softened its language on the potential for future rate hikes, by omitting a line from their previous statement which said the committee ‘anticipates that some additional policy firming may be appropriate’.
“While some market participants welcomed this softer language as a signal that the Fed could pause here, we think other participants may have been looking for slightly more dovish language, and that they may have been disappointed that the Fed Chair didn’t definitively shut the door on the potential for future hikes. Nonetheless, we think the most likely outcome following this meeting is that the Fed pauses here.
“The Fed stated that, based on its view of inflation and the labour market, rate cuts are not in the picture, and that it expects to keep rates at current levels through the end of 2023. The market continues to adopt a more bullish stance on rates, with Fed funds futures currently pricing in 70 basis points of cuts before the end of the year.”
What happened in the markets (source Commsec):
US markets
AS noted, the US retreated yesterday after Powell said there won't be any interest rate cuts if inflation remains too high, while signalling a possible pause in the central bank's hiking cycle after lifting rates by another 25 basis points.
Advanced Micro Devices (NASDAQ:AMD) shares fell by 9.2% after the chipmaker forecast quarterly sales below estimates due to a weak PC market. Estée Lauder shares tumbled 17.3% after the beauty products company slashed its full-year guidance. Shares of Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) both dropped 2% as crude oil prices continued to fall.
At the close of trade, the Dow Jones index fell by 270 points or 0.8%. The S&P 500 index slid 0.7% and the Nasdaq index shed 55 points or 0.5%.
European markets
Did the opposite of Wall St and climbed on Wednesday, with basic resources stocks up 0.9%. Shares of British education group Pearson jumped 10.1% after the stock was upgraded to "buy" from "underperform" by BofA Global Research.
The Eurozone unemployment rate fell from 6.6% to 6.5% in March (survey: 6.6%), pointing to a further tightening of the labour market. The continent-wide FTSEurofirst 300 index rose by 0.4% and the UK FTSE 100 index gained 0.2%.
Note, the European Central Bank will hand down its rates decision today.
Currencies
- Were stronger against the US dollar in European and US trade. The Euro rose from US$1.1013 to US$1.1088 and was near US$1.1055 at the US close.
- The Aussie dollar lifted from US66.49 cents to US67.03 cents and was near US66.75 cents at the US close.
- The Japanese yen jumped from 136.07 yen per US dollar to JPY134.85 and was near JPY135.25 at the US close.
- Global oil prices slumped by around 4% on Wednesday after the US central bank raised interest rates and as investors fretted about the global economy. US crude inventories fell by 1.3 million barrels in the past week, compared with forecasts for a 1.1 million-barrel drop.
- The Brent crude price fell by US$2.99 or 4% to US$72.33 a barrel.
- The US Nymex crude oil price shed US$3.06 or 4.3% to US$68.60 a barrel.
- Base metal prices retreated. The copper futures price fell by 0.4% and aluminium futures dipped by 2.2% as concerns about global economic growth persist.
- The gold futures price rose by US$13.70 or 0.7% to US$2,037 an ounce. Spot gold was trading near US$2,030 an ounce at the US close.
- Iron ore futures fell by US53 cents or 0.5% to US$105.48 a tonne.
It’s interesting times for the bank at the moment.
National Australia Bank’s profits climbed to $4.07 billion and will likely cling further with the latest rates increase.
Despite, the growth, the bank fell short of analyst expectations which had expected NAB’s interim profit to print at almost $4.2 billion.
NAB chief executive Ross McEwan said the bank had benefited from higher interest rates and a boom in business lending.
He noted the bank’s, “consistent investment in long term growth opportunities, while making choices for more targeted growth against the backdrop of a slowing economy and increasing competition.
“Staying safe and maintaining prudent balance sheet settings has been a key strategic focus, which positions us well for the risks and volatility stemming from recent rapid monetary policy tightening.”
Looking at the impact of interest rate hike son consumers, McEwan noted, “The impact of higher living and interest costs on household spending and the broader economy is becoming more evident and we have a range of options available for customers needing support.”
Meanwhile, Bendigo and Adelaide Bank (ASX:BEN) released its May economic update.
Bendigo and Adelaide Bank (ASX:BEN) Chief Economist David Robertson explores the prospects for the Australian economy.
Looking at interest rates he said, “The RBA are determined to get inflation back near its target range ‘in a reasonable timeframe’ and their current forecasts aren’t seeing the decline in inflation quickly enough for their comfort.
“The cash rate is now back to levels not seen for more than a decade and while still not high in absolute terms, it is the pace of rate hikes that is the challenge, being the sharpest increase since the late 80s.
“The RBA reiterated their intention to ‘keep the economy on an even keel’ as they try to manage inflationary pressures.”
Those pressures are keeping the RBA on its toes, despite headline CPI down to 1.4% for the first quarter of 2023.
“Core inflation is back down to 1.2% for the quarter, so there has been progress, but in the RBA’s eyes, not progress enough.
“The annualised Consumer Price Index should steadily fall to around 3.5% by year end, but before we can get any relief via rate cuts, we will need to see core inflation at or below 3%, and this may be more than year away,” Robertson said.
He also noted that the recovery in the housing market may only be temporary.
“Property markets recovered another 1% in April after the RBA pause a month ago. Housing and rental shortages together with a surge in population growth are expected to support residential property prices into next year, but the record peak to trough decline of 9% is still likely to extend into the teens.”