The RBA raised interest rates by 25 basis points to bring it up to 0.35% last Tuesday. This was the first rate rise in over 11 years, in which the central bank conceded it was time to lift the overnight cash rate from historical lows of 0.1%. This was a slightly larger rate rise than expected, with the market pricing in a cash rate of 0.25%. This was surprising given that it is standard to have rates sets at 0.25% intervals, so the next rate rise will likely either be a rise of 15 basis points or 40 basis points to bring the cash rate to either 0.5% or 0.75%. This rate hike was necessary to control inflation, in which the RBA’s hand was forced with the release of the latest core CPI figure of 3.7%, which is above the RBA’s target band of 2%-3%. The RBA could no longer wait for the release of wages data later this month, with Governor Phillip Lowe revealing that he has been hearing evidence of wage rises across the board anyway, particularly through the RBA’s business liaison program where they survey businesses to gain their own economic and business data. He will be hoping that the wages data released does indeed reflect this position. This put the RBA in the uncomfortable position of having to raise rates during an election campaign. However, any inaction would have led many to question the RBA’s independence, so they did the right thing. Lowe emphasised that the Australian economy is in a strong enough position to withstand such measures. In particular, he focused on the strong labour market, with the unemployment rate forecasted to drop to just 3.5% early next year. This would be the lowest rate of unemployment in nearly half a century. Furthermore, it is predicted to stay at that low level for quite a while. He also called for more rate rises in the near term. This is based on forecasts that core CPI will be around 4.75% in 2022, which is expected to moderate to around 3% by mid-2024. This would be back within the RBA’s target band. Soon after this announcement, all four major banks announced they will pass on the rate rise to customers. Other banks and lending institutions also passed it on, including the likes of Bankwest, Macquarie Bank, RAMS and Suncorp. This means that variable interest home loans will increase by 0.25% across all banks. Speaking of, some of these banks reported earnings last week. ANZ (ASX: ANZ) reported a half yearly cash profit of $3.1 billion, with a fully franked dividend of $0.72 per share. Their net interest margin (NIM) came in at 1.58%, which was pressured from home loan pricing due to competition, which is something all the major banks are facing. The NIM is the difference banks make between interest income earned over interest paid out to their lenders. NAB’s (ASX: NAB) cash profit was up 4.1% to $3.48 billion, with a fully franked interim dividend of $0.73 per share. NAB’s NIM came in slightly below consensus at 1.63%, slightly below consensus. At current prices, the trailing 12-month dividend yield for ANZ is 5.4%, beating NAB’s yield of 4.4%. Both banks paid out similar dividend amounts, but with ANZ at a lower share price, it earns a higher yield. Macquarie (ASX: MQG) annual net profit for the full year increased 56% to $4.71 billion, in which they announced a 40% franked dividend of $3.50 per share. Over in the US, the Federal Reserve lifted the federal funds rate by 50 basis points to bring it up to 0.75%-1%, as expected. Fed Chair Jerome Powell reiterated that the US economy was well positioned to handle these rate rises as household spending and business investment remain strong, as well as robust job gains supporting a low unemployment rate. Powell flagged 0.5% rate rises at the next two meetings, but played down the prospect of a 0.75% rate hike. This was in response to the bond market pricing in a 50-50 probability of a 0.75% hike at the time. US nonfarm payrolls increased by 428,000 for April, beating expectations of 400,000. This helped keep the unemployment rate steady at 3.6%. Wages rose higher, with average hourly earnings increasing by 0.3% to $31.85 in April. Looking to the week ahead, the rest of the big four Australian banks are making announcements. The consensus forecast is for Westpac (ASX: WBC) to report a cash profit of $2.97 billion, with their NIM to come in at 1.78%. Analysts at Citi expect an interim fully franked dividend of $0.60 per share. CBA (ASX: CBA) will also be providing an update for the third quarter. Analysts expect cash earnings of $2.17 billion for the quarter and their NIM to be 1.86%. We will also be taking a look at NAB’s survey of business confidence and Westpac’s consumer sentiment survey. Despite some of the prevailing conditions, we believe a strong economy will help bring positive survey results. More inflation data will be released, with the print for core CPI in the US expected to be 6.6%. This will give Powell further justification to continue raising rates by 50 basis points at the next couple of Federal Open Market Committee meetings. Interesting Finance Fact The total world stock market capitalisation was $116.8 trillion at the start of 2022 The world’s stock market capitalisation has increased 464% in the last 11 years, up from $25 trillion in 2009.
Have a great week,
Sam Waldron - Research Analyst