The Fed to increase rates, signs of hiring freezes in the US, and more...

For those that had the Queen’s Birthday public holiday yesterday, we hope you enjoyed the long weekend. For those that didn’t, well this is why the so called ‘Monday Briefing’ is being sent out on a Tuesday. Should I have renamed it the ‘Tuesday Briefing’? Perhaps I didn’t have enough time to reflect on this, as there’s a lot going on in the economy and the markets. Let’s dive straight into it.

The RBA hiked interest rates last week. Rates were raised by 50 basis points, or 0.5%, to bring the official rate to 0.85%. This was higher than expected, with the market having mostly priced in a rate of 0.75%. From an economic perspective, we were pleased to see the RBA taking a more hawkish stance, in which it is better to tackle inflation sooner rather than later.

Inflation is currently a greater concern than economic growth, and if the actions of the RBA contribute to containing inflation sooner than expected in the next year or so, investors in the market will likely be rewarded.

In other news, co-founder and former CIO of Magellan (ASX: MFG) Hamish Douglass will be returning in a new consultancy role. MFG has numerous challenges in the past few years, including underperformance, cancellation of investment mandates, Douglass taking leave and the CEO resigning.

Staying in Australia, gaming regulators in NSW and Victoria approved Crown Resorts (ASX: CWN) takeover by the Blackstone Group, one of the largest private equity firms in the world. This deal still needs approval by gaming regulators in Western Australia as well as the Federal Court.

Over in the US, a number that stuck out to us last week was the initial jobless claims. This figure came in at 229,000, above forecasts of 210,000. Now this is just a singular data point, but if these jobless claims start consistently becoming higher, it may just be a sign that there is a slight ease on the tight US labour market.

There are further signs if you have a look at the shift in hiring policies by major companies. Elon Musk recently announced plans to reduce Tesla’s workforce by 10%. Other big names such as Apple, Microsoft and some large consumer companies have announced they are slowing or suspending hiring.

If the labour market starts to loosen, this would reduce the upward pressure on labour costs for businesses. So why does this matter? If businesses don’t pass on these costs, businesses take a hit to their bottom line due to higher costs. If businesses do pass on these costs, this increases the prices of their goods and services, which is contributes to inflation.

The economy could do with some downward pressure on inflation, with CPI coming in above expectations at 8.6%, with the print for core CPI being 6%. This was driving by surging food, gas and energy prices, something that we are experiencing back in Australia, but not to the same extent as the US. Traditionally Americans pay less at the bowser than Australians do. Currently, some states in the US (such as California) are paying more for fuel than in Australia.

It just so happens that the Fed are meeting this week, soon after these inflation figures were reported. Although the Fed have previously indicated the likelihood of a 50 basis points rise, they left the door open to bigger hikes if they deemed it necessary. It seems now that it will be necessary. The market has all but priced in a 75 basis points rate hike, to bring the federal funds rate to 1.5%-1.75%.

The Fed will be walking a tightrope, balancing the task of bringing down inflation whilst negotiating a ‘soft landing’ for the economy. A smaller rate hike will leave the market concerned about the Fed not doing all they can do combat inflation, and a higher rate hike than 75 basis points may make the market anxious about this ‘soft landing’.

As of right now, the Fed’s tightening cycle hasn’t really weighed down the economy. Fed economists have forecasted US GDP to grow by 2.8% in 2022 and 2.2% in 2023. Their base case situation is that the tightening cycle will lead to reduced inflation at the cost of some slower economic growth.

We will also be looking at some other data to give some more insights into how the US economy is tracking. Core retail sales for May are expected to grow 0.8% from April. Business inventories are expected to increase by 1.9% for May. Higher business inventories indicate an easing of consumer demand. Furthermore, a build-up in inventories results in businesses lowering prices to sell off these extra goods, which puts downward pressure on inflation.

Back in Australia, there will be a few survey results released that we are keeping an eye out for, including the NAB business confidence survey for May and the Westpac consumer sentiment survey for June. The unemployment rate will also be released, with economists forecasting it to remain flat at 3.9%.

Interesting Finance Fact

Despite inflation being 8.1% in the Eurozone, the official interest rate is currently at -0.5%.

Yes, banks are charging Europeans for leaving money in the bank! That’s one way to incentivise consumers to keep spending, despite the high inflation environment in Europe. Europe is experiencing more significant inflationary pressures than Australia due to Europe being more exposed to the war in Ukraine. This includes Europe’s dependence on Russian gas.

To cut the European Central Bank (ECB) some slack, it is quite a challenge being the central bank for 19 countries, where economic conditions are not uniform across the member states. Some of the smaller countries haven’t been experiencing the stronger growth that the big European economies had. The ECB recently announced the first interest rate hike in over 11 years will happen in July.

Have a great week,

Sam Waldron - Research Analyst

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