Markets Overview
- ASX SPI 200 futures down 0.7% to 6,630.00
- Dow Average down 0.5% to 30,364.83
- Aussie down 0.8% to 0.6871 per US$
- U.S. 10-year yield rose 11.2bps to 3.4733%
- Australia 3-year bond yield rose 33bps to 3.45%
- Australia 10-year bond yield rose 28bps to 3.96%
- Gold spot down 0.6% to $1,808.53
- Brent futures down 1.0% to $121.00/bbl
Economic Events
- 10:30am: (AU) June Westpac Consumer Conf SA MoM, prior -5.6%
- 10:30am: (AU) June Westpac Consumer Conf Index, prior 90.4
Stocks may struggle for traction Wednesday after a climb in Treasury yields and the dollar ahead of a Federal Reserve meeting that’s expected to deliver a hefty interest-rate hike to fight inflation.
Equity futures fell for Japan and Australia and were steady for Hong Kong following a jump in Chinese shares traded in the US.
US contracts fluctuated after the S&P 500 closed down for a fifth straight day — its longest losing streak since January. The technology-heavy Nasdaq 100edged up on an upbeat forecast from Oracle Corp.
Treasuries extended their worst rout in decades, with two-year yields hitting a level last seen in 2007 and the 10-year yield approaching 3.5%.
Traders anticipate a 75-basis-point hike from the Fed on Wednesday, the biggest since 1994. A closely watched part of the US yield curve inverted briefly, signaling concerns that restrictive policy will sap the economy.
The dollar rallied, the Japanese yen sank to a 24-year low and the pound was around the weakest since March 2020. Oil held under $120 a barrel.
Other News
The Reserve Bank of Australia “will do what’s necessary” to bring inflation back down to its 2-3% target, Governor Philip Lowe said, as he warned interest rates would need to push higher to achieve that goal.
Inflation could accelerate to as much as 7% by year’s end and is unlikely to begin slowing until the first quarter of 2023, Lowe said in an interview with Australian Broadcasting Corp.’s 7:30 Report on Tuesday.
“Australians need to be prepared for higher interest rates,” he said, adding that it would be “reasonable” to expect the cash rate to climb to 2.5% at some point. “How fast we get to 2.5%, indeed whether we get to 2.5%, is going to be determined by events.”
The RBA wrongfooted markets and economists last week when it hiked by a bigger-than-expected 50 basis points to take the cash rate to 0.85%, and signaled further increases to come. Most economists are now predicting it will raise by another half-point at next month’s meeting.
The central bank is among more than 50 monetary authorities that have raised by at least a half-point in one move this year. The Federal Reserve is increasingly expected to increase rates by 75 basis points at this week’s meeting as US inflation escalates further.
The RBA’s outsized hike came as Australian power prices are soaring and labor costs are pushing higher, exacerbating existing inflation pressures.
Many economists expect the RBA will take the cash rate a bit over 2% by year’s end; that’s well below the 3.6% that money market are pricing in. The difference is explained by economists’ view that Australians will struggle to keep pace with the associated increase in mortgage payments in an economy where the household debt-to-income ratio is around 186%.
Lowe expressed confidence that most Australians would be able to manage higher borrowing costs.
“At the individual level some people have taken loans that they may not have wanted to take out in retrospect, but the overall picture, which is really very much the focus of the Reserve Bank, is a pretty resilient economy,” he said.
To date, consumers are coping well with higher rates, aided by a sharp build up in savings during the pandemic. But as loan repayments increase further and the wealth effect reverses due to falling property prices, households may find themselves squeezed.
