We had a series of important events this week which really underscored for me some of the central questions about inflation, inflation targeting and Central Bank policy.
So today I want to explore this in more detail, as the ECB lifted rates by 75 basis points and the Dow closed higher on Thursday after struggling for direction as Federal Reserve officials including chairman Jerome Powell vowed to continue the fight against inflation.
The broader market was choppy and struggled for direction, swinging between gains losses as Treasury yields climbed on hawkish remarks from Powell vowing to persist with rate hikes.
Over in Europe the European Central Bank hiked interest rates by a historic amount and President Christine Lagarde hinted it could do the same again as part of “several” future moves to escalate officials’ attack against rampant inflation.
So, the common theme from Central Bankers is inflation must be contained. Indeed, Philip Lowe yesterday reemphasised this imperative, despite the impact in the short run, because of the longer-term consequences in a speech he gave.
But the deeper question is whether Central Bankers know what they are doing. And Mervyn King at one time the Governor at the Bank of England, was very critical of the assumptions underlying the attempt to control the current inflation cycle.
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In New Zealand, the tightening rate cycle which is currently in full swing – with more to come, is crushing the housing market, as illustrated by the August 2022 QV House Price Index for August which was released today. The average house value in New Zealand had fallen by some $89,917 to the end of August (down 8.5%) compared with the January peak – which is a rate of some $424 of lost value per day. “It looks as though it’s going to get tougher before it gets any easier for sellers. First-home buyers will continue to struggle for finance with tight credit conditions and affordability constraints. Plus, there’s still plenty of new homes in the pipeline, which will add further to oversupply, putting further downward pressure on prices.”
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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
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The tightening continues, as the Bank of Canada joined the party once again and delivered a fourth consecutive outsized interest-rate hike in a bid to slow the nation’s economy and drag inflation down from four-decade highs.
The Bank of Canada’s decision was a statement-only affair with no new forecasts.
Monetary authorities around the world are slamming on the brakes to halt a post-pandemic surge of inflation. The Reserve Bank of Australia raised its policy rate by a half-percentage point on Tuesday, and Banco Central de Chile also stunned investors with a 100-basis-point move. The European Central Bank is poised to deliver a 75-basis-point hike on Thursday and the US Federal Reserve meets later this month, with an increase of at least 50 basis points expected. The rate hike pass-the-parcel is going to continue for some time, which begs the question, at what point will the music stop? Given the embedded nature of the inflation shock, it’s probably more a symphony than a song.
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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.
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.
US Markets started September on a weak note, after the Monday holiday, extending a slide that started at the end of August, as hawkish comments from Fed policymakers and data signaling U.S. economic momentum raised fears of aggressive interest rate hikes.
The S&P is down nearly 18% so far this year, while the NASDAQ has shed over 26% as rising interest rates hurt megacap technology and growth stocks. Central Banks are being data dependent – meaning their rapid rate-lifting cycle decisions are determined by the emerging data stream.
Overnight The Institute for Supply Management’s services index unexpectedly improved to 56.9 last month, while S&P Global’s final August gauge of business activity dropped to 43.7. In both surveys, a reading of 50 is the dividing line between expansion and contraction. The last time the ISM measure exceeded the S&P Global gauge by that much was during the depths of the pandemic in April 2020. The most striking divergence in these two prominent gauges of US services activity since April 2020 can probably be traced in large part to what types of companies are surveyed and differences in methodology.
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I discussed the RBA rate rise on the ABC this morning on RB with Patrica Karvelas. “Mortgage ‘prisoners’ trapped as RBA lifts cash rate” https://www.abc.net.au/radionational/programs/breakfast/mortgage-prisoners-trapped-as-rba-lifts-cash-rate/101412718
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This past week has seen a significant shift in market sentiment, driven off the back of hawkish tones from Jackson Hole, as Central Bankers underscored that squashing inflation was their main task, whatever the cost. Markets had been betting on a Fed Pivot soon (recalling the last cycle where markets had their way and the Fed turned), hence the bear market run-up in the past couple of months, but that for now is in tatters.
Further falls into a typically wobbly September can be expected. Mind you, the FED has not explained why their forecasts were so off, so it does beg the question as to whether we should believe them now.
And consider the wider fallout globally, as higher rates and a strong dollar will put many markets and countries under pressure. Note the swing between the USD and Yuan, and the Yen. Perhaps this is not accidental. Plus, the markets are worried about “China slowing, euro zone recession and a hawkish Fed”.
Equity funds recorded the fourth largest weekly outflow of 2022, while bond funds saw investors pull out money for a second straight week.
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Bye-Bye Pivot: Market Update 3rd September 2022 [Podcast]
Our latest Friday afternoon chat, picking over the latest charts, which are telling a confusing story, as Central Banks continue to hike into a head wind. How will this play out?
You can get Tarric’s charts here: https://avidcom.substack.com/p/charts-that-matter-2nd-september and follow him on Twitter @Avidcommentator
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Digital Finance Analytics (DFA) Blog
Blowing The House Down: With Tarric Brooker [Podcast]
