Rate hike likely; iron ore miners soar; Australia’s economic resilience
Ahead of another likely rate rise tomorrow, the ASX climbed higher led by iron ore miners and global oil futures.
The S&P/ASX200 gained 35.50 points or 0.49% to 7,337.00. Over the last five days, the index has gained 1.49%, but is down 1.45% for the last year to date.
The market looks to be reacting to China’s potential relaxation of COVID-19 restrictions.
On the oil front, OPEC+ cartel countries are opting to maintain production output cuts of 2 million barrels per day to try to keep prices high.
Brent futures were up 1.7% to a two-week high of $87 per barrel, while US WTI futures were 1.8% higher to $US81.45 per barrel at 1.20 pm.
On the back of that, Woodside Energy Group Ltd (ASX:WDS, LSE:WDS, OTC:WOPEF) jumped 2.24% and Santos Ltd (ASX:STO) surged 2.94%. Beach Energy Ltd was 5.39% higher as it considers upping its bid for Warrego Energy, which sees Hancock Energy in the lead for the takeover.
As for the iron ore miners, Fortescue Metals Group (ASX:FMG) Ltd surged 7.32% to a six-month high of $21.12 as the session’s biggest gainer. Rio Tinto Ltd gained 4.06% and BHP Group Ltd (LSE:BHP, ASX:BHP) was 2.62% higher.
Best and worst-performing sectors
The best-performing sectors last week included Materials up 4.14% followed by Information Technology up 2.23% and Communication Services up 1.92%. The worst-performing sectors included Energy down 3.15% followed by Consumer Discretionary down 1.09% and Financials down 1%.
Best-performing stocks in the week included Fisher & Paykel Healthcare Ltd up 19.52% followed by Allkem up 9.26% and Mineral Resources up 9.11%. The worst-performing stocks included Woodside Energy down 5.95% followed by Bank of Queensland down 5.29% and Orica down 5.11%.
Today, the best-performing sectors were Materials up 1.63% and Energy 1.78% higher, while Utilities dropped 0.69% and Industrials lost 0.80%.
Three things to watch for the week ahead
eToro market analyst Josh Gilbert, shares his three things to watch in Australia in the coming days.
1. RBA rate decision
Following this week’s lower-than-expected inflation reading and a drop in retail sales for the first time in 2022, the RBA’s next move might well be another step down in its rate cycle. Both data releases will have pleased the RBA, with consumer spending beginning to slow and signs that inflation is nearing its peak.
Essentially, the RBA is in a position where the pressure to move aggressively to control inflation is gradually easing and may point towards a pause in its rate cycle early in 2023.
However, the RBA won’t be getting ahead of itself, given that this is the first monthly CPI reading for Q4 and doesn’t cover the entire CPI basket released in the quarterly data.
Another important factor for the RBA to consider ahead of Wednesday is the local housing market, which is still under pressure, with national average home prices down 7% from their peak in April.
The big question will be whether the RBA will hike by 15bps or 25bps on December 6, though it’s worth noting that there will be no rate decision in January, so the RBA may opt for the larger move.
2. GDP data
The Australian economy is renowned for its resilience and before COVID-19 in 2020, Australia registered 29 years of consecutive GDP growth, setting a record in 2014 for the longest run of uninterrupted GDP growth in the developed world.
On December 7, GDP data will be handed down, with expectations for 6.3% growth year-over-year. This data will be for Q3, so it won’t take into account the recent retail sales decline, rate rises from October and November, or the full effect of September’s hike.
Household spending will likely be a strong driver of growth, with consumers choosing to spend big on dining out as well as travelling domestically and internationally given the easing of COVID-19 restrictions.
However, according to the OECD, GDP could be set to slow down in 2023 to 1.9% with what now looks like a slowdown in consumption.
3. Trade balance
On December 8, Aussies will get an update on the balance of trade for October. This data point is the total value of exports minus the total value of Australia’s imports.
Economists use the balance of trade to measure the relative strength of a country’s economy and it also supports the Australian Dollar when the balance is positive.
September’s reading showed a strong surplus of A$12.4 billion, well above market expectations of A$8.8 billion. The disruption to energy markets from the geopolitical tensions in Europe has led to strong demand for Australian energy exports, which has helped lift the trade balance to new highs in 2022.
Expectations are for another increase this month at $13 billion, but a decline in iron prices through October and weak demand from China could weigh on the reading.
Another 25 point rise?
City Index senior market analyst Matt Simpson said the consensus was for the RBA to hike rates by 25bp tomorrow.
Whilst the potential for a pause cannot be ignored, I suspect the RBA is more likely to hike rates by 25bp tomorrow as it does not meet again until February.
What has happened since the last RBA meeting?
- November 10: Australia’s central bank says it’s nearer to the point when it can wait on rates (Reuters).
- CPI fell to 6.9% y/y, down from 7.4% and beneath 7.5% – suggesting inflation has peaked.
- Governor Lowe reiterated his belief that the economy can have a soft landing.
- PMIs continued south, business sentiment has been flat.
- Consumer inflation expectations hit a record high according to one survey.
- OIS curve is pointing lower as the case for a higher terminal rate diminishes.
- The RBA’s cash rate currently sits at 2.85%, after hiking rates for a record seven consecutive meetings totalling 275bp. And despite being a late starter compared to the RBNZ, Fed and pretty much everyone – the RBA continues to believe the terminal rate will remain lower than their peers. For comparison, RBNZ has an OCR of 4.25% and is expected to rise to at least 4.5%, yet a recent poll suggests the RBA’s terminal rate will be around 3.6% next year.
I expect the RBA to hike rates for a record eighth consecutive meeting tomorrow by 25bp. With that said, we shouldn’t discount the potential for a hold – which I’m sure consumers would love. Yet they’re more likely to hike to 3.1% as they do not meet again until February, so technically January is kind of a pause. But the case for a pause is certainly building.
Some measures of inflation expectations are moving lower and the monthly inflation print suggests inflation has peaked at 7.4% y/y – as it fell to 6.9%, compared with 7.5% expected.
All 30 economists polled by Reuters expect the RBA to hike by 25bp tomorrow, however, money markets currently estimate just a 56% probability – which means there’s a 44% chance that they will pause.
What’s next for the Australian stock market?
Wealth Within founder and chief analyst Dale Gillham gives his take below.
The All Ordinaries index is once again defying logic rising for the eighth consecutive week, which is quite uncommon and by last Thursday, it had risen 14.58% since its last major low on October 3.
Regular readers will remember the All Ordinaries Index rose 12.23% over eight weeks from June 20 to August 16 this year before falling over 10% over the next seven weeks. So, will we see a repeat of this?
While the market will fall, I don’t believe it will last for seven weeks like it did previously. That said, given the run-up has occurred over eight weeks and is higher than expected, the fall may last longer than two weeks although not by much more.
As I have previously, stated, there is strong support between 7,000 and 7,200 points, which is likely to stop the fall that will unfold very soon.
As I continue to say, now is not the time to be buying into lots of new positions, as there will be better opportunities in the not-too-distant future.
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