Australian households are among the most indebted in the world and the interest rate increases by the Reserve Bank will generate a big potential problem” for many people and the wider economy.
We have a big potential problem courtesy of the way we have run our housing system, for not just the last decade but for the last at least three decades.
Our housing system is only weakly governed by real housing policy objectives, that is, ensuring everyone can own or rent a decent affordable home. Instead, it is governed by objectives of wealth creation, and sometimes by concerns about financial system stability.”
Macro-economic issues like the rising cost of living, inflation and economic pressures are influencing trends in first-party fraud, with almost one in five (19 per cent) Australians believing it’s okay to tell a “white lie” and report having less debt than they actually have in a financial service or loan application.
The implications for financial stability as rates rise are potentially significant!
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To no one’s surprise the Federal Reserve delivered its third consecutive 0.75% rate increase on Wednesday as the Federal Open Market Committee raised its benchmark rate to a range of 3% to 3.25% from 2.25% to 2.5% previously. It was all pretty much as expected although his specific comments on the housing market may have shocked some. He said effectively that dropping home prices won’t stop the quest to strangle inflation. Property bulls please note.
So, after this latest rate hike, the Fed has now lifted its benchmark rate by 300 basis points, or 3% in just six months as the central bank accelerates policy to restrictive territory with the aim of slowing growth enough to make a meaningful dent in inflation.
“We can’t fail to do that,” he said, referring to the central bank’s mission against price growth. “That would be the thing that would be most painful for the people that we serve. We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t. What we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation. That’s what we’re doing. We haven’t given up the idea that we can have a relatively modest increase in unemployment.”
But critically, there were no signs of easing its push into restrictive territory as it battles to cool the embers of inflation.
“We’ve just moved into the very, very lowest level of what might be restrictive [territory],” Powell said in the press conference that followed the monetary policy statement. “In my view, there’s a ways to go.”
As a result, the Fed now sees its benchmark rate rising to 4.4% in 2022, above the 3.4% forecast in June, paving the way for further front-loading of rate hikes in the remaining two Fed meetings for the year and into 2023.
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Today’s post is brought to you by Ribbon Property Consultants.
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Tomorrow the Fed will announce its next rate decision. If its 75 basis points as expected by many in the market, we will probably see little reaction, unless there are some trajectory changing comments in the post announcement press conference. If they do a full one percent that might change the market dynamics. The takeaway is that everyone does expect rates to go up—and by an amount that, prior to the past couple of months, would have been shockingly large.
Perhaps then no surprise that on Tuesday Wall Street ended lower as the eve of a U.S. Federal Reserve, in recognition of the FED’s aspiration to quash inflation, despite economic and market consequences.
One of the main drivers of continued inflation is expectations, which can become a self-fulfilling prophecy.
Expectations are very hawkish, and the Fed can come out just as expected and still be more dovish than expected. That may limit the market downside from this meeting and just may provide some upside going forward.
But then, earnings expectations are falling, and markets remain over-valued relative to the weaker economy, so that may pull markets further down. But I suspect the FED theatre will be a bit of a yawn. At least for now.
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants. If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing alongside you. Buying property, is both challenging and adversarial. The vendor has a professional on their side. Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make. Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest. Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
As foreshadowed, we are now seeing the sharp reversal in asset prices, which were driven through the roof due to ultra-low interest rates, central bank quantitative easing, and government support through COVID plus huge debt growth.
Of course, the recent gains were largely spurious, and a correction was always going to come – hopefully some watching our shows are best prepared for this process (which will take some time), but be clear wealth will be destroyed across property, shares, bonds, metals and crypto.
No surprise then that U.S. stocks ended sharply lower on Friday, tumbling to two-month lows as a warning of impending global slowdown from FedEx hastened investors’ flight to safety at the conclusion of a tumultuous week.
The session also marked the monthly options expiry, which occurs on the third Friday of every month. Options-hedging activity has amplified market moves this year, contributing to heightened volatility.
All three major U.S. stock indexes slid to levels not touched since mid-July, with the S&P 500 closing below 3,900, a closely watched support level and suffereing its worst weekly percentage plunge since June.
“It’s been a tough week. It feels Halloween came early” said David Carter, managing director at JPMorgan in New York. “We are facing in this toxic brew of high inflation, high interest rates and low growth, which isn’t good for stock or bond markets.”
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The RBA was interrogated by Parliament today regarding its monetary policy stace and interest rates. But it was all a bit pointless as really as the Federal Reserve sets interest rates in the US, but effectively also for the entire world, given the fact that the US dollar behaves as the reserve currency.
Persistently high inflation in the United States and elsewhere has forced the Federal Reserve to aggressively raise interest rates, giving the dollar a significant yield advantage that has triggered a rampaging rally against its major global peers.
That will put pressure on the RBA. Eventually, the Fed’s actions will come back to bite it and the US. By then all the many trillions of dollars of stimulus work done during the pandemic will have been unwound. What a phenomenal waste of time, money and effort.
The fallout on the FED’s myopia will be felt more in other countries, including Australia, which means we are on the end of the see-saw driven by the US. This is soft power at its worse, transmitted to a monetary system which is built to favour one nation over the rest. The question is of course whether this will change. Without major reform it will not, not least in recognition of fact that many international institutions such as the IMF, WEF and BIS are strongly aligned to the interests of the US. So The Monetary Arms Race Is Here.
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants. If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing along side you. Buying property, is both challenging and adversarial. The vendor has a professional on their side. Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make. Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest. Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
A broad sell-off sent U.S. stocks reeling on Tuesday after a hotter-than-expected inflation report dashed hopes that the Federal Reserve could relent and scale back its policy tightening in the coming months.
This is the last inflation report before the Fed’s policy meeting next week. Investors had hoped the Fed would have some reason to raise rates less dramatically. But the Fed is determined to quash inflation despite the risk of pushing the economy into a recession. And Tuesday’s report dampens hopes that inflation has already peaked.
Financial markets have fully priced in an interest rate hike of at least 75 basis points at the conclusion of the FOMC’s policy meeting next week, with a 33% probability of a super-sized, full-percentage-point increase to the Fed funds target rate. The central bank’s target range is currently 2.25 per cent to 2.50 per cent.
In a note following the August CPI data, Goldman Sachs sees a more aggressive Federal Reserve. “We have raised our forecast for the Fed’s December meeting to a 50bp rate hike (vs. 25bp previously). We now expect a 75bp hike in September followed by 50bp hikes in November and December, which would take the funds rate to 4-4.25 per cent by the end of the year.”
With hopes of a “Fed pivot” firmly dashed, all three major U.S. stock indexes veered sharply lower, snapping four-day winning streaks and notching their biggest one-day percentage drops since June 2020 during the throes of the COVID-19 pandemic. The VIX rose more than 14% to 27.27.
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An important discussion about the games banks are playing in relation to the setting of deposit interest rates, in the context of the RBA rate hikes. Steve Mickenbecker from Canstar and I explore the elements which are driving returns lower than they should be, and what we can do about it. Another case of the apathy tax at work! Steve Mickenbecker is in Canstar’s Group Executive Team, bringing more than 30 years of experience in the Australian financial services industry. As a financial commentator for Canstar, Steve enjoys sharing his expertise across topics such as home loans, superannuation, insurance, mortgages, banking, credit cards, investment, budgeting, money management and more. Go to the Walk The World Universe at https://walktheworld.com.au/
Peter Marshall has been working in the Australian banking and finance industry for over 20 years and oversees Mozo’s extensive product database. He is regularly sought out for his expert commentary and analysis on banking and interest rates trends by print, radio and TV media.
https://mozo.com.au/authors/peter-marshall
Go to the Walk The World Universe at https://walktheworld.com.au/
I caught up with Steve from Canstar to discuss the fallout from the RBA rate rises. Steve Mickenbecker is in Canstar’s Group Executive Team, bringing more than 30 years of experience in the Australian financial services industry. As a financial commentator for Canstar, Steve enjoys sharing his expertise across topics such as home loans, superannuation, insurance, mortgages, banking, credit cards, investment, budgeting, money management and more.
