Get ready for a Melbourne Cup day rate rise

Investing

Get ready for a Melbourne Cup-day rate rise was the consensus opinion from an economics panel at the Forbes Australia Business Summit in Sydney. 
Gareth Aird, Jo Masters, Michael Bogoevski speaking at the Forbes Business Summit 2023. www.scottehler.com

The panel concurred that the RBA hasn’t finished its raising cycle amid difficult-to-control inflation and rising house prices, and, given it really only has the one lever, the bank is being frustrated in influencing targets by energy and commodities prices and stubbornly high household spending. 

But it was the uncertainty of the current situation which will cause the most pain for businesses – particularly those seeking new financing.  

Key points
  • A rate rise is likely at the RBA’s November meeting 
  • Central banks can’t control energy and commodity prices 
  • Inflation needs to be anchored soon so households can make longer term decisions. 
  • Commodity prices are rising at the same time as the USD 
  • Housing prices will likely continue to trend up for the foreseeable future 
  • Increasing rates and bond yields are pressuring the price of financing while uncertainty is causing pain for business. 

It’s a “whacky” world out there at the moment according to CMC Head of Distribution APAC and Canada, Michael Bogoevski. 

“Normally as a trader and investor, you look at the way markets move with each other. So [you] look at correlations. [There are] really unusual interrelationships now between the way markets move. For example, the US dollar has been going up, it normally should see commodities going down. Simple as that. They’re both going up. So very unusual circumstances,” he says. 

Bogoevski maintained what is also unusual given rising commodity prices (although it does indicate a more optimistic outlook) is that we are seeing the manufacturing cycle starting to kick up. Taiwanese, Chinese and U.S. PMI figures are pushing higher. 

“It’s going to be a really tough period I think for the central banks because they’re going to have to make a call on this very shortly. Otherwise, we might be in this period of limbo for too long,” he says. 

Barrenjoey’s chief economist Jo Masters agreed that the current environment was “really difficult” for business decision-making, highlighting the price of money and bond-yield uncertainty as being particularly vexing. 

“We’ve talked about rates uncertainty. We’ve also got ten-year bond yields in the US that are pushing above 5%. So risk-free rates are up, money is hard to come by and expensive,” she says. 

“But there are opportunities and I think if we look [to] 2024 and 2025, what we’re going to see I guess is what we characterise as a K-shaped recovery. That is there are parts of the economy that are really going to hurt – leveraged households, for example. [But] there are parts of the economy that are doing really well. Older Australians never had so much cashflow and that’s true across different sectors as well.” 

Adding to this market uncertainty is the fact that the unemployment rate is not acting in the way you would expect given a monetary tightening environment. 

CBA’s Head of Australian Economics, Gareth Aird says the unemployment rate is still very low. It’s only moved up 0.1 percentage points over the past year, which does look somewhat surprising given the RBA has raised the cash rate 400 basis points since May of last year. 

But the picture is nuanced, he says. 

“If you look at spending per capita, it’s actually been coming down. So normally you would’ve expected unemployment to rise a bit more than it has and I think that’s coming in the pipeline. But if you look at the underemployment rate … it is on a clear upward trend. So that’s the first sign of maybe a bit of a slow. It’s pretty much a consensus call that the unemployment rate will continue to grind higher. That in turn will alleviate some pressures on the wages side that will help to bring inflation down. And that’s essentially what the central bank is trying to engineer.”  

Seek independent advice and consider the relevant Terms and Conditions at cmcmarkets.com.au when deciding whether to invest in CMC Markets products. CMC Markets Stockbroking Limited (ABN 69 081 002 851 AFSL No. 246381).

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