OPINION: The sharemarket appears to be struggling to synthesise key signals from data releases and messages from the US central bank.
On December 15 last year, the US Federal Reserve expected its near-zero cash rate to rise only modestly to 0.9 per cent by the end of 2022 and to 1.6 per cent by 2023. Financial markets had a similar view, pricing in just a 1 percentage point Fed funds rate 12 months ahead.to investors. The Fed raised rates by 0.75 percentage points, as widely expected, but accompanied this with big upside surprises to its projections for where it thinks its cash rate will land at the end of 2022, 2023 and 2024.
“The Fed joins the Bank of England and Riksbank in effectively factoring in a recession as the cost of containing inflation,” says Kieran Davies, our chief macro strategist.Coming into the Fed meeting this week, we had taken profits on about half of our shorts/hedges in US and European credit. After being short over $8 billion of US and Euro credit since late last year, we had monetised almost all of this position over May and June on the basis we thought risk would rally.
Bank deposit rates north of 3 to 4 per cent and high-grade bonds paying 6 to 7 per cent are massively increasing the hurdle rates for all investments. And as much higher long-term interest rates reduce the estimated value of defined benefit pension fund liabilities globally, trustees are inexorably shifting out of the high-risk equities exposures they had previously assumed to try to generate aggressive returns to close the gap between their assets and their unfunded future obligations.
Desperate to avoid any more policy missteps vis-à-vis peers in the face of the federal government’s independent review of its decision-making framework, the risk is the RBA blindly follows the Fed even though governor Philip Lowe has recently been at pains to point out that Australia does not share the same labour cost concerns as the US.
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