Hedge Clippings | Friday, 27 January 2023
In case you're still basking on the beach (or wherever) in blissful ignorance, Australia's December quarter inflation figure came in higher than expectations at 7.8%. Of course, if you ARE still away, you may also not be spending your Friday afternoon reading Hedge Clippings, but either way, it seems like RBA Governor Philip Lowe's New Year is going to start off being as difficult as his old one, although he'll no doubt be considerably more careful with his longer term forecasts than last year.
The bottom line is that we suspect inflation is likely to stay stronger for longer, disappointing the optimists who were expecting it to peak early in the new year under the influence of last year's sharp rate rises. Thus, given the RBA's, and their offshore colleagues' previous perilous prognostications (try saying that quickly after a glass or three of Friday's lunchtime vino) that inflation can't and must not be allowed to become entrenched, there's going to be more pain in the form of rate rises, most likely when the RBA board gets together for the first time next Tuesday week.
Early reports suggest some leading bank economists are predicting only one more rate rise, but the futures market is indicating at least two more, with no easing in sight until 2024 at least. So with the RBA's official rate currently sitting at 3.1%, and a 100% market probability of another 0.25% in February, we could see rates at 3.8% sometime in the June quarter. The consecutive rate increases totaling 3% in 2022 were the sharpest/fastest in most memories, so another 50 to 75 bps will put the icing even on that.
The problem is that consumer spending hasn't changed significantly to have had an impact on inflation, and as yet, whilst there's obviously some stress in the housing market and in mortgage land, the flow-on effects that Philip Lowe is looking for haven't occurred. Of particular worry will be the fact that whilst last year's inflationary spike was primarily imported, unavoidable, or externally generated, (floods, oil, supply chain, Ukraine etc) there's the risk that home-grown inflation from wages pressure in a tight post-COVID labour market takes over.
The theme of many of last year's editions of "Hedge Clippings" was interest rates and inflation, so it looks as if this year's shaping up the same way. Ditto Ukraine, which sadly doesn't look like ending quickly. Meanwhile, it does (hopefully) seem that the focus on the hard done by, but over-privileged whinger from Montecito has faded, although possibly only until his next issue - likely to be not getting a front row seat at the Coronation.
Next week we'll publish the Australian Fund Monitors Review of fund and sector performances for 2022. In the meantime, we can recommend the four part documentary series on Bernie Madoff currently showing on Netflix. Or if you want something less serious, but no less enjoyable, try "Slow Horses" on Apple TV. Both are variously both more educational or entertaining than the six part Netflix saga of Harry and Meghan. That's it - the last time we mention them. (Promise).
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