The morning catchup: Fed to raise rates; retail sales remain strong; positive investor sentiment

© Reuters The morning catchup: Fed to raise rates; retail sales remain strong; positive investor sentiment

The ASX is set to open higher today, after solid results on Wall St on Friday.

ASX 200 futures are trading 12 points higher, up 0.16% as of 8:20 am.

The S&P 500 index was up 0.2%, while the Nasdaq index added 0.9% and the Dow Jones Industrial Average index was 0.1% higher.

The markets have been strong in 2023, however, the trend could hit a speed bump on Thursday when the Federal Reserve delivers its cash rate verdict.

Many analysts are expecting a smaller rate rise on cooling US inflation.

“A slower pace of rate hikes will give the committee time to assess the full economic effects of monetary tightening thus far,” Moody’s Investors Service reported.

The markets expect a 25-basis point hike, taking the benchmark lending rate to 4.50-4.75%, a level last seen in 2007.

“They are seeing the desired effects of policy,” Rubeela Farooqi, of High Frequency Economics, told AFP. “They don’t want to keep on pushing until they get the economy into a recession,” she said.

Here's what we saw (source Commsec):

• The Euro fell from near US$1.0895 to US$$1.0835 and was near US$1.0865 in late US trade.
• The Aussie dollar held between US70.90 cents and US71.25 cents and was around US71.10 cents in late US trade.
• The Japanese yen held between 129.60 yen per US dollar and JPY130.25 and was near JPY129.85 in late US trade.
• Global oil prices fell by as much as 1.6% on Friday. Traders cited higher Russian supplies and end-week profit-taking for the fall in crude prices. OPEC+ delegates meet next week while central bank decisions are expected in the US and Europe. T
• The Brent crude oil price fell by US81 cents or 0.9% to US$86.66 a barrel.
• The US Nymex crude oil price fell by US$1.33 or 1.6% to US$79.68 a barrel. On the week, Brent fell 1.1%; Nymex fell 2%.
• Base metal price futures prices fell by as much as 4.5% on Friday. The US aluminium futures price fell by 0.7%. The US copper futures price fell by 1.1%. Reuters reported that lead rose 4.6% on the week and note that copper inventories stand at 10- month lows.
• The gold futures price fell by US60 cents to US$1,929.40 an ounce. Spot gold was trading near US$1,927 an ounce in late US trade. Over the week gold rose $1.20 or 0.1%.
• Iron ore futures rose by US21 cents a tonne or 0.2% to US$122.70 a tonne. Over the week iron ore rose by US54 cents or 0.4%.

eToro market analyst Josh Gilbert shares his three things to watch in Australia in the coming days.

1. Fed interest rate decision: Slowing down?

The slowdown in the Fed’s interest rate cycle looks to be on the horizon, with the market expecting Jerome Powell to hand down a 25-basis point hike this week. If a 25-basis point is delivered from the Federal Reserve, it could spell more optimism for markets, given that it would most likely mean that rates hold below 5%, lower than some Fed officials had anticipated in 2022.

Markets already believe that we are near the top of the Fed’s rate hike cycle as inflation continues to decline, with the Nasdaq rallying more than 10% to start 2023. Consensus is for two more hikes of 25 basis points in February and March before another decision in May, which could signal a pause.

Let’s remember, though, that the Fed has been clear that they need to see more signs of inflation easing. There is obviously progress on inflation, but the Fed wants to be sure it can bring prices under control.

So, it's important for investors not to get ahead of themselves, despite a good start to the year, because although a pause may be around the corner, rates will likely stay high until inflation returns to the Fed’s 2% target.

2. Retail sales AU: Aussies going strong

The Australian consumer has clearly stayed resilient in 2022 but as rate rises and inflation start to pinch, with December’s CPI reading at 8.4%, consumers may start to temper their spending habits in the new year and retail sales may begin to drop off. This week’s reading of December retail sales (January 30) could round off a strong year for consumer spending, with every month showing gains.

Expectations are for a rise of 0.4% for December after November’s strong reading of 1.4%, thanks to Black Friday and Cyber Monday sales. We will be watching if consumer spending continued into the festive period, shopping for presents and eating out.

Department store spending continued to rise in November, and could well do the same in December, with Myer reaping the rewards as it posted its strongest sales numbers for 20 years in the last five months of 2022. This December reading will likely show shoppers' last spending spree from Christmas sales.

3. Australian investors feeling positive, but inflation and recession a worry

The majority of Australian retail investors are shrugging off the downturn that has gripped financial markets for more than a year, according to eToro’s latest Retail Investor Beat survey*.

There has been an uplift in sentiment, with 77% of the Australians polled feeling confident about their portfolios. It might be surprising to see investors so upbeat after a difficult year for investing, but the majority of this cohort thinks in years and decades – and the ASX200 performed better than most major markets in 2022.

When asked about the biggest risk across the whole of 2023, those citing inflation came in at 16%, with more (24%) seeing a global recession as the main threat. Investors will know that inflation may not have peaked in Australia and is well above the RBA’s target.

The hot inflation reading last week will also mean that rates will now rise again, after a pause was potentially on the cards. But shrewd retail investors are still clearly investing for their future and maintaining long-term mindsets – primarily by steadily raising their investments in equities and more defensive asset classes.

* The Q4 Retail Investor Beat was based on a survey of 10,000 retail investors across 13 countries and three continents. The following countries had 1,000 respondents - UK, US, Germany, France, Australia, Italy and Spain. The following countries had 500 respondents - Netherlands, Denmark, Norway, Poland, Romania and the Czech Republic. The survey was conducted from December 14-24, 2022, and carried out by research company Appinio. Prior to Q2, previous waves of this survey were conducted quarterly in conjunction with Opinium. Retail investors were defined as self-directed or advised and had to hold at least one investment product including shares, bonds, funds, investment ISAs or equivalent. They did not need to be eToro users.

Read more on Proactive Investors AU

Disclaimer