12-09-2022
George Lucas, Raiz Group CEO
It was a positive week in US markets, with all sectors on the S&P 500 finishing up Friday as the market shook off weeks of declines. At home, the ASX 200 was also up for the week.
Notably, while the month of September is usually when you expect risk off, the markets have had a distinctly “risk-on” tone over the past week, with the safe-haven US dollar down a bit from its highs, credit spreads slightly narrower, and US Treasury yields higher.
The rise in US yields is interesting as it has been one of the main drivers for recent equity market weakness — the rise in real yields, in particular. This rise has dented equities in recent months and is a key reason why equities have struggled.
Downbeat eurozone economic forecast
In Europe, the European Central Bank’s latest economic forecasts, published alongside its meeting last week where it lifted rates by 75bp, painted a bleak picture of the outlook for the eurozone.
The ECB warned of the economy stagnating, and noted eurozone inflation was at its steepest rate in almost 50 years in August, at 9.1%, up from 8.9% in July, and was at risk of becoming entrenched.
On this front, both headline and core inflation were projected to remain above the central bank’s target by the end of its forecast horizon in 2024, the ECB said.
So, the big challenge for the ECB is to press ahead with interest rate tightening until inflation is much more clearly under control as the region’s economy likely slows further.
RBA indicates slower rate hikes ahead
In Australia, rates were also a focus, with Reserve Bank of Australia Governor Philip Lowe confirming in a speech that the central bank would slow the pace of tightening over coming months.
The markets had expected the RBA to follow up the 50bp rate hike with a smaller 25bp rate at the October meeting, but this October hike may now be delayed. Even so, we can still expect the RBA cash rate to reach 3.6% by mid-2023.
Meanwhile, the 0.9% quarter-on-quarter rise in Australia’s Q2 GDP was broadly in line with market consensus as well as the RBA’s August forecast, while jobs data due Thursday will likely show Australia’s unemployment rate stayed around its 48-year low of 3.4% in August.
Elsewhere, Malaysia’s central bank last Thursday raised its main policy rate by 25bp, to 2.50%, and signalled that further hikes were likely over the coming months.
However, with inflation set to fall back later in the year, Bank Negara Malaysia’s tightening cycle will be gradual and probably come to an end in early 2023.
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