Insider: After a morning of tentative losses, local shares fell further as sentiment cooled following slightly hawkish comments from the Reserve Bank at its final meeting of the year.
As expected by most economists, the Reserve Bank of Australia raised the cash rate by 0.25 percentage point to 3.1% as part of its fight against rising inflation. RBA Governor Philip Lowe said the bank needed to keep a close eye on labor costs, household spending and the pricing behavior of businesses to avoid a “price-wage spiral”. He signaled further rate hikes next year.
Kerry Craig, global market strategist at JPMorgan Asset Management, said Lowe’s comments were far less dovish than expected and aligned with the Federal Reserve Chairman Jerome Powell Last week, it triggered negative sentiment in the market.
“Hope is [the RBA’s policy makers] We’re going to be signaling more pauses,” Craig said. “They haven’t, so in terms of the big drop in the gold market today, the more interest rate-sensitive sectors got hit, and IT and those higher-value stocks were also hit. fell sharply. “
Craig said the RBA’s move showed the central bank wanted to be flexible amid turmoil in global markets and changing local economic data. However, given Australia’s relative immunity from this year’s broader global sell-off, local stocks remain better positioned than those elsewhere in the world.
That being said, Craig said the market could remain choppy for a while if demand for labor continues to strengthen and wages rise. “Given the inflation rate [7.3 per cent] and take into account the inflation rate they want [between 2 and 3 per cent], there does seem to be a big disconnect between the two. “
NAB director of market economics Tapas Strickland said the RBA hike was partly due to continued strong consumption across Australia despite rising costs and interest rates. A survey of business indicators on Monday showed private wage spending rose 2.9% from the previous quarter, compared with 3.1% in the second quarter, despite slower job growth.
“We haven’t seen quarterly growth rates of this magnitude since the peak of the mining boom in 2007,” Strickland said. “This generally highlights the need for the RBA to keep raising rates and it is too early to consider a pause.”
The Australian Bureau of Statistics also released data on Tuesday showing consumer spending rose 20.7 per cent from a year earlier. NAB analysts expect the RBA to hike rates by another 25 basis points in February and March, taking the cash rate to 3.6%.
The decline on Wall Street followed overnight after stronger-than-expected services data on Monday sparked fears over interest rates.
The Institute for Supply Management’s services index rose 2.1% to 56.5 in November from 54.4 in October. That reflects a larger working population and sharply rising wages, both of which could lead the Federal Reserve and other global banks to further tighten monetary policy to manage ensuing inflation.
Strickland said these higher-than-expected results contrasted sharply with the rival S&P Services Purchasing Managers’ Index (PMI), which was weaker and suggested prices were slowing. “It’s not clear which measure we should trust, although markets and the Fed tend to watch the ISM more closely,” he said.
ANZ senior economist Catherine Birch said strong labor and business activity data from the US and Australia could lead to further rate hikes, overshadowing positive sentiment from China easing some COVID-19 restrictions.
Meanwhile, the local currency fell more than 1% to 67 cents after stronger-than-expected U.S. economic data spurred a stronger dollar.
Daily Quote: “Inflation in Australia is too high at 6.9 per cent in the year to October,” RBA Governor Philip Lowe said shortly after announcing the central bank’s pre-Christmas rate hike. “Global factors largely explain this high inflation, but strong domestic demand relative to the economy’s ability to meet demand is also at play.”
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