Economic and market news
Markets were unsettled ahead of the US midterm elections. Midterm elections generally hand control of at least one of the houses to the non-government party. However, there are concerns that the Republican party will win significant power and disrupt the government’s agenda. Amid this, the Federal Reserve raised the US official interest rate by 0.75 percentage points this week, as expected. Comments from the Chair of the Board, Jerome Powell, were taken as indicating that the peak in rates in the US might be higher than previously expected, and that the ‘window to avoid recession had narrowed’, thanks to the persistence in inflationary pressures. However, his remarks also suggested potential slowing in the pace of policy tightening at one of the next two meetings.
In related news, new data show that, while the unemployment rate in the US rose from 3.5 per cent to 3.7 per cent, there was an unexpectedly large increase in jobs in October (261,000). This suggests continuing underlying strength in the economy despite the pace of interest rate increases.
In the UK, the Bank of England also raised its official rate by 0.75 percentage points, and warned that the country is likely now facing a prolonged recession. This move was the eighth consecutive raising decision, bringing the bank rate to 3 per cent, the highest in 14 years. However, it was reported that the Governor indicated that the peak rate may not be as high as current market expectations of 5.25 per cent. This was said to put it at odds with the Federal Reserve.
In Australia, a speech by the Reserve Bank Governor was taken as an indication that policy tightening will continue until inflation is clearly under control, so as to avoid inflation expectations becoming unanchored from the target. However, commentators suggested the Bank has set itself a ‘high bar’ for returning to the previous pace of tightening of 0.5 percentage point increases.
Alongside the policy news and data, there was analysis of the major banks’ financial results. It was suggested that impairment of home loans is still very low, supported by record low unemployment and high employment, and financial buffers that homeowners built during the pandemic. Similarly low levels of distress in business lending was taken as a sign that people are not pulling back on discretionary spending, such as entertainment and eating out, despite the increases in interest rates. That said, it was noted that there is a still a number of rate rises to feed through into loan payments in both residential and commercial lending books. This analysis was seen as an indication that monetary policy may have to go higher for longer, in order to bring about the slow down in economic activity needed to bring inflation back to the 2-3 per cent target band.
Separate from the economic news and commentary there was considerable focus on cyber security. Recent significant data breaches at a major telecoms company and private health insurer have brought the issue to the top of the agenda. This dovetailed with discussion of the issues facing the immigration process in Australia, with visa backlogs still impeding firms accessing the skilled workforce they need, particularly in industries such as IT.
Australian indices
ASX 200: Fell slightly, 0.26 per cent over the week, to 6958.9 points at the close on Tuesday.
All Ordinaries: Also softened, 2.71 per cent in the past week, closing at 7150.1 points on Tuesday.
Government Bonds
Government Bond Yields (Source: Bloomberg)
|
NAME |
COUPON |
PRICE |
YIELD |
1 DAY |
1 MONTH |
1 YEAR |
|
GTAUD2Y:GOV Australia Bond 2 Year Yield |
0.25
|
93.86 |
3.39% |
+13 |
+13 |
+281 |
|
GTAUD5Y:GOV Australia Bond 5 Year Yield |
2.75 |
95.68 |
3.69% |
+14 |
+13 |
+243 |
|
GTAUD10Y:GOV Australia Bond 10 Year Yield |
1.75 |
81.30 |
4.03% |
+13 |
+19 |
+228 |
|
GTAUD15Y:GOV Australia Bond 15 Year Yield |
3.25 |
87.06 |
4.33% |
+13 |
+25 |
+224 |
Reserve Bank of Australia (Source:RBA)
|
RBA CASH RATE TARGET (RBATCTR:IND) CURRENT (per cent) |
MOST RECENT DECISION (percentage points) |
MOST RECENT CHANGE (percentage points) |
1 YEAR PRIOR (per cent) |
|
2.85 |
+0.25 (1 November 22) |
+0.25 (1 November 22) |
0.10 |
Currencies (source:RBA)
As at the close on 8 November, AUD/USD had fallen 0.64 per cent on last week, to 0.6464. The AUD/RMB rose, 0.23 per cent, in the week to 4.6813.
Commodities
There was reported volatility in commodity prices over the week, amid differing takes on the direction of the Chinese economy, particularly its property market. Rumours about a possible end to lockdowns had apparently strengthened prices, particularly copper which is seen as a ‘barometer’ product. However, the markets apparently retreated on indications from the Chinese government that there would be no reversal of the CVOID-zero policy.
Property
In a turnaround this week, it wasreported that auction clearance rates hit a six-month high in Sydney (and a five-month high nationally) as ‘sellers faced reality’ of sharply rising interest rates and discounted prices. However, in line with this, the volume of auctions was said to be around half that of this time last year.
Similarly,it was reported that the ‘deal flow’ in the commercial property market has slowed for the second quarter in a row, dropping 24 per cent year-on-year to $16.4 billion, as investors act on concerns about a correction in the face of a slowing economy.
