Continued hawkish actions from the United States Federal Reserve again weighed on global share and bond markets in September, along with an ill-judged very stimulatory United Kingdom budget not helping fragile global sentiment.
The result was that share market values are almost back to their mid-June lows (with the Australian share market as measured by the All-Ordinaries index closing at 6,678.1 points, down by 7.6% for the month), while bond yields have broken back above their mid-June highs.
The Reserve Bank of Australia (RBA) once again increased the official Cash Rate, with a further 0.50% per annum increase in September (following on from the increases in May, June, July, and August). The RBA Cash Rate now stands at 2.35% per annum.
September RBA policy meeting minutes suggested it may raise rates by only 0.25% at today’s policy meeting (given interest rates are now closer to neutral). However, the tumbling Australian Dollar may give cause to again increase rates by 0.50%. The Australian Dollar fell by 6.1% last month, with 1 Australian Dollar currently buying 64.2 United States cents.
Global share markets values were all well down for the month, with the United States Dow Jones Index falling 8.8%, the London FTSE falling 5.4%, the Japan Nikkei 225 falling 7.7%, and the Hong Kong Hang Seng Index falling 13.7% in September.
Once again, the key driver for markets was the United States Federal Reserve meeting and associated commentary. Although “the Fed” baulked at raising rates by a full one percentage point in September, any relief this might have offered markets was shattered by a major upward revision to the anticipated future policy moves.
The median forecast for the Fed funds rate among Fed members is 4.40% at year-end, implying a range for the Fed funds rate of 4.25% to 4.50%. Back in June, the Fed expected the funds rate would end this year in a 3.25% to 3.50% range, or a full one percentage point less than it now expects!
The Fed is also anticipating a more notable rise in the unemployment rate to 4.4% by the end of next year, or a 0.9% increase from its recent low of 3.5%. Even with this downward pressure in the United States’ economy, the Fed sees core annual inflation only slowing to 3.1% by the end of 2023 (and it is not until end of 2024 that core inflation gets closer to the target rate).
Despite growing recession fears, the continued sell-off in bond markets reflects that, in large part, economic activity has yet to change all that much in either the United States or Australia since the interest rate hikes began. While the interest-rate sensitive housing market has started to cool in both economies, employment demand and consumer spending remain firm both in Australia and the United States.
Given the above, it seems likely that central banks will continue to aggressively increase interest rates until there are clearer signs either of notable slowdown in core inflation, and/or notable slowdown in employment and consumer spending.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation, and investment objectives.