The Point

Crispin Murray’s weekly ASX outlook

The recent recovery in equity markets looks to be ending as the S&P 500 fell -1.2% and the NASDAQ -3.9% last week.

Australia remains more defensive in this environment, falling just 0.3% for the week. More hawkish comments from the Fed prompted the fall.

It signalled a 50bps hike in rates for May, absent any major new shock. It also reinforced the message that quantitative tightening is on its way. While this was known, it triggered a further sell off in long-dated bonds.

US 10-year Treasury yields rose 32bps for the week. It also took the yield curve back into positive territory.

This reinforces the key message that the Fed needs overall financial conditions to tighten sufficiently to cool wage inflation.

Surging equity markets loosen overall conditions, and the Fed is likely to try and prevent this.

Tim Hext: RBA in final preparation for take off

The RBA’s “loss of patience” was widely noted this week.

Investors will now be watching Q1 CPI data on April 27 (“likely around 1.7% and 1.2% underlying”, says Pendal’s Tim Hext) and Q1 Wages Price Index on May 18 (“less spectacular but won’t stop a June tightening”).

There’s also a good chance one of the next unemployment numbers will be below 4%, says Tim.

“The RBA will therefore be able to say in May that inflation is sustainably within its band in the medium term and can tighten in June.” (A May hike ahead of an election is less likely.)

“The short end of the bond market is now predicting cash rates to peak around 3.5% in early 2024. If mortgage holders were aware of this impending doom house prices would be off 10% tomorrow.

“Mortgage brokers I’ve spoken to are telling clients rates shouldn’t go up by more than 1% to 1.5%. The average size of a new mortgage is now well over $600,000 – so an extra $20,000 a year in interest is coming borrowers’ way if markets are correct.”

Tim expects rates to finish 2022 around 1.25% and 2023 around 2.5%.

Weekly Australian equities outlook

Australian data suggests ongoing economic strength despite worrying signs in Europe, says Pendal portfolio manager Jim Taylor.

“Policy decision and timing in Europe are complicated by a strong inflationary pulse. This is underpinned by continued capacity constraints, second-order effects of the Ukraine war and China’s Covid response.”

Meanwhile in Australia retail sales are almost back to their pre-Omicron peak in November. Fashion and eating out dominated the February sales data with about 15% growth.

“Statistics indicate housing credit growth continues to accelerate to a post-GFC high, while residential approvals have rebounded strongly from a Covid-induced delay,” says Jim.

“Business credit growth is also strong, running at 10% year-on-year. This is also a post-GFC high. Other data shows household wealth growing as quickly as ever.

“The ratio of job vacancies to unemployed people has also spiked to a record high 75%.

“Normally for every job vacancy there are three-to-four unemployed people available. Now there are only about 1.25.”