The lowdown:The local bourse’s rally boiled down to better than expected US CPI data released overnight. Fears that further aggressive rate hikes would trigger a recession eased significantly,leaving some analysts worried investors were jumping the gun.
The US report showed inflation slowed in October for a fourth straight month since it hit a peak of 9.1 per cent in June,dropping to 7.7 per cent – 0.2 per cent better than economist forecasts. Inflation also slowed more than expected after ignoring the effects of food and energy prices,a measure the Fed pays close attention to. However,shelter costs continued to accelerate.
Tribeca Investment Partners’ portfolio manager Jun Bei Liu said,although inflation levels had softened slightly,inflation remained an issue in both the US and Australia and is not likely to fall quickly within the next 12 months.
“Even though interest rates may not go up as much compared to previous expectations,based on how they have gone up,it’s still quite a big number for consumers to absorb,” Bei Liu said. “It’s going to be volatile as we work through this slowing economic condition,combined with still-high interest rates … We will have good days like this,and then we will have down days in the coming weeks.”
The change in interest rate expectations triggered a reversal across the index,said Bei Liu. Growth stocks like tech companies (which were most impacted by recession fears) began gaining ground,whereas defensive stocks such as utilities declined,alongside companies like Computershare that benefit from higher interest rates.
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BetaShares chief economist David Bassanese said the data showed the COVID-related surge in goods’ inflation was beginning to seriously decline,seen most clearly in clothing and car prices.
However,Bassanese noted the speed at which rates would fall remained unclear,warning that the RBA could still lift its rates by 0.25 per cent next month regardless of “Fed pivot” expectations,especially considering the increase in local consumer near-term inflation expectations which were released earlier this week.
Given the tight US labour market and solid wage growth,as well as pressure placed on energy costs because of the Russia-Ukraine war,Bassanese remained cautious.
“My base case view remains that US inflation will remain sufficiently problematic in coming months that the Fed will have no choice but to keep raising rates in a way that ultimately tips the US economy into recession,” he said. “In turn,this suggests that global equity markets have yet to hit bottom,notwithstanding a potentially solid bear market rally in coming weeks in expectation of a smaller US Fed rate increase next month.”
ANZ’s Australian rates strategist Gregorius Steven said the data fit with the Fed dialling back the size of rate increases in December. ANZ forecasts a 50 basis point hike,taking the ceiling to 4.5 per cent.
The local dollar lifted by 2.6 per cent to 66 US cents as the US dollar dropped to its lowest level in eight weeks.
The yield on the 10-year Treasury,which helps set rates for mortgages and other loans,fell to 3.85 per cent from 4.10 per cent late on Wednesday,the largest daily fall since 2009. The two-year yield,which more closely tracks expectations for Fed action,dropped to 4.32 per cent from 4.58 per cent.
Tweet of the day:
Quote of the day: “The economic picture ahead is dire,” Twitter chief executive Elon Musk wrote in an email to employees on Wednesday night (US time),sparking fears of a potential bankruptcy. “Without significant subscription revenue,there is a good chance Twitter will not survive the upcoming economic downturn. We need roughly half of our revenue to be subscription.”
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With AP
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