As much as it takes

Date: 06/09/2022

After making it through the August ASX company reporting season relatively unscathed with only a few minor surprises, all eyes are on interest rates again. In the US last week the Fed stayed their current course of strategy and dialogue, strongly suggesting that they’ll meet inflation head on with “as much as it takes” until they bring things over there back under control. Many here in the land of Oz are firmly of the opinion that our own RBA will follow suit but I’m not so sure……

First, and as I’ve mentioned before, our inflation stats are released each quarter whereas most other western countries report monthly. This means the boys at the bank may not realise inflation has peaked or is slowing until well after it’s already happened.

Second, Australian household mortgage debt is high compared to most other western economies so the impact a rate rise has here is potentially more profound than say in the US for example.

If you consider these two points and if we’re at or reaching peak inflation in real time, aggressive action will not be in anyone’s best interest (pun intended). Recently there has been an abundance of discussion regarding the mortgage interest rate and it’s “lag effect” meaning, how long it takes a rate rise to actually impact borrowers and slow spending, thereby addressing inflation (in part). Three months of lag is the general consensus. So, the fear is that if Lowey and Co. simply follow the US in aggressively raising rates, by the time it bites they may find they’ve gone too far.

Another factor that needs consideration is the sheer number of first home buyers who entered the market in 2021/22 and existing borrowers who fixed their loans that will be coming off these fixed rate loans. This cohort may suddenly find themselves paying double what their original repayments were but this hasn’t happened yet so they’re not affected. I don’t think any of this is lost on the RBA but as they’ve already conceded, the timing and level of interest rate change can be easily miscalculated.

So what does this mean for our share market? Last week saw the effect US statements can have on the Aussie market where we dropped around 500pts. We opened this morning at 6,840 after being as low as 6,780 last week. Consequently we were able to find some entry points and move a good deal of cash into their intended investments. We’re still holding cash awaiting the announcement from Martin Place today. With many tipping 50 basis points, I’m hoping our mates in Sydney might have developed a little peripheral vision under the intense heat of the media spotlight and be a little more cautious with just 25 basis points.

If the latter prevails we may see a surge in the market as a result but if 50bps does indeed turn out to be the number I think we’ll continue sideways and slightly down. Either way it’s a tough call.