This will be quite a significant week in terms of economic decisions. The RBA will be meeting on Tuesday, where the board could hike rates for the first time since early 2010. With the overnight cash right currently sitting at 0.1%, interest rates futures has implied yield of 0.23%. This essentially means that the market is pricing in a rate rise to 0.25% with a 86.66% probability. We are confident that the RBA will raise rates as we believe the RBA are already behind the curve and need to catch up. The case that the RBA is behind is strengthened by the inflation data released last week, where CPI in Australia came in at 5.1%, with trimmed mean CPI being 3.7%. These figures are both above the target inflation rate of 2%-3%.
The last time the RBA raised rates during an election campaign was in 2007, which some say was a contributor to the electoral ousting of the John Howard Government. In fact, there’s a bit of a déjà vu in terms of the arguments used, in which the incumbent Coalition Government argued that Australians needed them as the better economic managers during a rising interest rate environment, and Labor arguing that the Coalition are the incumbent Government presiding over an economy that required interest rates, reflecting poor economic management. We do note that a big difference is that rates were being raised to 6.75%, not 0.25%.
What’s even more certain than a rate rise in Australia is a rate rise in the US. The market has given a 0% probability of the Fed leaving interest rates unchanged, and just a 3% probability of rates rising just 25 basis points, or a quarter of a percent. The CME Group 30 Day Fed Fund futures prices indicates a 97% probability that there will be a rate hike of half a point from 0.25%-0.5% to 0.75%-1%. With a typical rate hike being 25 basis points, this is a double rate hike. With the majority of the Fed board becoming more hawkish on inflation, we strongly believe that a double rate hike will occur.
However, some results from last week have clouded the outlook for monetary policy in the next couple of years. US GDP figures for the first quarter were reported last week, with a contraction of 1.4% from the previous quarter. However, this was coming off high growth where Q4 2021 GDP grew by a massive 6.9%. Contrary to what some might expect, the market rallied on the back of this news.
You may ask, why did the market react so positively to declining GDP? With many investors concerned that the US economy has been running too hot, a contraction in GDP signifies some cooling. This could reign in some of the inflated prices which have been impacting companies earnings, which is a potential silver lining to the GDP figures.
With the potential of prices being reigned in, this could reduce the scope of interest rate rises over the next two years, and even bring about a quicker drop in interest rates soon after. The market had the view that this could be another reason to pause the brakes of the Feds hawkish pivot in the medium-term. This post negative GDP results market rally explained that the market has developed a reliance on cheap Fed money. The optimism ended though, with the market pulling back at the end of the week.
The US 2 Year Treasury yield is the leading indicator for where interest rates in the US will end up at in the next 2 years. It is currently sitting at 2.73%.
There will be lots of employment data released this week, which should still confirm that the US labour market is very tight. Nonfarm payrolls are expected to have grown by 400,000 in the month of April. This is expected to keep the unemployment rate flat at 3.6%. These results will be on the back of initial jobless claims data released last week, which came in at 180,000, which remains low. This gave the Fed a further boost in their case continue tightening monetary policy.
Monetary policy decisions and labour data aside, it is still a packed week for earnings. In the Australian market, major banks ANZ, NAB and Macquarie will all be reporting. ANZ and NAB will be reporting half year results and Macquarie will be reporting full year results, with their fiscal year ending in March.
Bell Potter expects ANZ to declare a fully franked interim dividend of $0.71. NAB has been implementing sound cost control measures which should help bring about strong results regarding its cash profit.
There will be a few notable companies reporting in the US this week. This includes vaccine manufacturer Pfizer, who are expected to post revenue of US$23.97 billion.
Advanced Micro Devices (NASDAQ: AMD) is forecasted to post earnings per share of US$0.91 and revenue of $5.01 billion. With semiconductor company Qualcomm (NASDAQ: QCOM) reporting strong results last week, we are hoping to see this to flow through to the results of AMD. Demand among PC and gaming end-users is expected to remain strong, particularly as the latest gaming consoles are in the early stage of their life cycles.
Interesting Finance Fact
Retail investors make up 99.6% of total investors in China
In the US, the stock market is mainly dominated by institutions. In China, however, the stock market is dominated by retail investors.
Have a great week,
Sam Waldron - Research Analyst