Inflation leads to rate rises, which are a party pooper for the share market. Now there could be 2 coming in the next 13 months.
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One expert has warned that one part of the market is signalling that there will be 2 interest rate rises from the Reserve Bank in the next 13 months or so.
The share market has obsessed over a jump in inflation, and therefore interest rates, all throughout this year.
Rate hikes make borrowing money more expensive, therefore it is generally not helpful to stocks, especially for growth companies.
Higher interest rates also pull up the yield for bonds, making them more attractive to investors. Money that might have been ploughed into the share market is then diverted away, thereby decreasing demand for stocks.
BetaShares chief economist David Bassanese warned Monday that the Australian bond market is rising.
“Despite the [protests] of RBA governor [Philip] Lowe, the local bond market is now pricing in two rate hikes by end of 2022.”
Australian bonds have risen more than US
While the US Federal Reserve has flagged that a tapering in COVID-era stimulus would be coming soon, the RBA has insisted rate rises are years away.
The market reaction seems to suggest that message is falling on deaf ears.
“Indeed, local 10-year bond yields have lifted a little more than those in the US since the bottom in yields in late July – the yield spread has widened – with the market simply not believing the RBA won’t follow the Fed.”
Bassanese added that this means Australian fixed-rate bonds are looking attractive, especially compared to its US counterpart.
“RBA minutes are due tomorrow and governor Lowe speaks on ‘Independence, Mandates and Policies’ on Thursday.”
Pengana Australian Equities Fund analyst Mark Christensen said earlier this month that his team has been buying up ASX shares that could be resilient against higher rates.
“We look for business models that have an element of inflation protection built into them, and which have pricing power.”
Inflation triggers coming
The Delta variant of COVID-19 that brought Australia’s 2 most populous cities to a standstill for months now seems to be waning.
Vaccination coverage is now high in both Sydney and Melbourne, with the former already lifting many restrictions.
But funnily enough, this good news may translate to higher inflation, as the economy roars back to life.
Bassanese said last week’s numbers expectedly showed that employment and business conditions both suffered during the lockdowns.
But underlying sentiment was positive, suggesting a rapid recovery.
“Business and consumer confidence are still holding up fairly well – at or above long-run average levels – suggesting the economy is poised to bounce back solidly once the NSW/Victoria lockdown ends.”
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