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Think Big: The market and the RBA disagree on interest rates — so what happens next?

Throughout Australia’s pandemic emergence, the RBA has remained steadfast on its outlook for interest rates – no rate hikes until … Read More
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This article was originally published by Stockhead

Throughout Australia’s emergence from the pandemic, the RBA has remained steadfast on its outlook for interest rates – no rate hikes until 2024.

But as UBS researchers pointed out this week, the post-COVID global economic rebound “has been faster than any time in history”.

In turn, investors are betting “the monetary policy cycle will also be faster”.

Markets are now pricing for around 70 basis points (0.7%) of hikes by the end of 2022.

That’s a fair bit earlier than 2024, and raises the question of what the RBA will do next.
 

The unwind — step 1

Before any rate rises, economists are turning their attention to the first phase of the RBA’s unwinding plans; the roll back of its bond-purchasing (QE) program.

In the wake of the east coast Delta lockdowns, the bank extended its monthly bond-buying program through to “at least February (2022)”.

But in UBS’ view, markets are still being “too complacent” about possible changes to the program.

The UBS analysts’ base case is for the bond-purchase program to be halved in February — from $4bn per month to $2bn — before stopping in May.

However, “we see a risk that the bank may opt for an earlier hard-stop of QE at the February meeting”, UBS said.

At that point, the central bank will own around 35% of all Australian government bonds outstanding.

Such a stake is starting to skirt the edges of an RBA-influenced paradigm that could disrupt the orderly functioning of the bond market, UBS said.

The RBA will also take its monetary policy cues from offshore.

Most commonly in central banking, all roads lead to the US Fed — which has flagged plans to start tapering its own QE program in November.

“We think the RBA will be uncomfortable owning such a large share of the market; especially if global central banks have started the taper (or even stopped),” UBS said.
 

The unwind — step 2

Next up is what the RBA will choose to do with its yield-curve control (YCC) program.

Currently, the YCC anchors three-year government bond yields at the same level as benchmark interest rates (0.1%).

Recall that markets are pricing for rate hikes as early as 2022.

Such a scenario would create a “policy difficulty”, CBA strategist Phillip Brown said this week, in terms of what the RBA does with its YCC program.

In response, markets sent the yield on government bonds with a maturity date of April 2024 to almost 0.2% this week.

Then the RBA turned heads on Friday, when it waded back into the market and bought $1bn of Apr-24 bonds in a range between 0.105% to 0.12%.

Brown and CBA rates strategist Martin Whetton also drew attention to an inflation reference in a speech this morning from RBA Governor Philip Lowe.

“Whether inflation in a given year is 1.7% or 2.3%, most people in the real economy rightly don’t focus too much on this,” Lowe said.

His remarks suggest the RBA remains “relatively indifferent to inflation risk”, Whetton and Brown said.

And combined with the RBA’s YCC bond acquisition today — its first since February 26 — “neither action was one that suggests the RBA is about to about-face on policy”, the pair added.

At the same time, they noted that today’s bond purchases didn’t do much to change the market’s mind about the pace of future rate hikes:

The chart shows markets are still pricing for 2022 rate hikes, even following today’s bond purchases. Source: CBA

So for now, the standoff continues as markets price in 2022 rate increases while the RBA looks to be holding firm to its 2024 stance.

In his analysis earlier this week, Brown said there are a couple of technical options the RBA could take on the YCC program, such as bringing it into a range (rather than a fixed number).

But realistically, if the RBA is going to raise rates in 2022 or 2023, it will most probably have to abolish the YCC program on 2024 government bonds, Brown said.

When’s the best time to do that? Either late-2022 or early-2023, Brown said.

That’s because Apr-24 bonds will still have a maturity date of more than 12 months — meaning they will still trade in the bond market and not short-term cash markets.

Of course, the next best time to do it would be “right now”, Brown said.

But that looks unlikely, given the bank’s recent commentary.

And perhaps even more unlikely following Friday’s purchases in the bond market.

The post Think Big: The market and the RBA disagree on interest rates — so what happens next? appeared first on Stockhead.








Author: Sam Jacobs

Economics

New Zealand cash rates – the canary in the coal mine?

My son, Angus, ventured into the Sydney residential market at the beginning of the year acquiring a small apartment, with what I considered to be an enormous…

My son, Angus, ventured into the Sydney residential market at the beginning of the year acquiring a small apartment, with what I considered to be an enormous loan from one of the Big Four. At the time the fixed four-year home loan rate was around 1.95 per cent per annum. Today, the advertised rate has jumped 1.0 per cent per annum to around 2.95 per cent. This reflects the Australian four-year Government Bond yield moving up from 0.20 per cent at the beginning of 2021 to the current 1.32 per cent.

The likely response to this change from property buyers today is that a much higher proportion of their mortgage will be attributed to a variable home loan. This rate typically reflects the Reserve Bank of Australia’s (RBA) cash rate, and at 0.10 per cent per annum it is currently at a record low, and well below the “emergency low” of 3.0 per cent per annum implemented during the Global Financial Crisis (6 months to September 2009).

Across the ditch, the Reserve Bank of New Zealand (RBNZ) has raised its official cash rate for the second time in two months by 0.25 per cent to 0.75 per cent per annum to counter growing inflation, which hit 4.9 per cent in the September 2021 quarter, and is expected increase to 5.7 percent in the March 2022 quarter.

RBA vs RBNZ cash rate

Markets are currently pricing in five more 0.25 per cent increases by the RBNZ over the next twelve months to a targeted 2.0 per cent per annum. Will New Zealand be seen as a canary of the coal mine moment given inflation has become a global problem? Only time will tell, however if cash rates happen to jump by 1.5 per cent and this filters through into the rate for variable home loans. The tailwinds currently being enjoyed by asset owners (with debt) – close to nil interest rates – could easily become headwinds.

The US inflation figure for October 2021 hit 6.2 per cent, a 30 year high.  Selected CPI subcategories saw the following 12 month changes: Beef +24 per cent, gasoline +51 per cent, natural gas +28 per cent and used cars and trucks +26 per cent. The UK was not far behind, with an inflation rate of 4.2 per cent for October.

ds-us-inflation-2021-2

Global supply chain bottlenecks and shifting consumer demand from services to goods could well be transitory, but as the Founder of Bridgewater Associates, Ray Dalio, warns, “raging inflation” is eroding people’s wealth today – particularly those who have their money in cash.




Author: David Buckland

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Economics

Dow Jones, the S&P 500, and Nasdaq price forecast after sell-off on Friday

Wall Street’s three main indexes ended sharply lower on Friday as news of a new COVID variant worried investors around the world. The World Health Organization…

Wall Street’s three main indexes ended sharply lower on Friday as news of a new COVID variant worried investors around the world.

The World Health Organization (WHO) on Friday designated a new COVID-19 variant detected in South Africa, and a lot of people didn’t want to hold risk assets on Monday morning or are afraid of what that could look like Monday morning.

Markets are reacting negatively because it is unknown at this point to what degree the vaccines will be effective against the new strain and would it initiate new lockdowns around the world. David Kotok, chairman and chief investment officer at Cumberland Advisors, added:

All policy issues, meaning monetary policy, business trajectories, GDP growth estimates, leisure, and hospitality recovery, the list goes on, are on hold. The new strain may complicate the outlook for how aggressively the Federal Reserve normalizes monetary policy to fight inflation.

The new Omicron coronavirus is detected in Britain, Italy, Netherlands, Germany, Israel, Belgium, Botswana, Denmark, Hong Kong, and Australia for now.

Britain has already imposed travel restrictions on southern Africa, while the European Commission is considering suspending travel from countries where the new variant has been identified.

The upcoming week will be busy, and investors will pay attention to Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen’s appearance before Congress to discuss the government’s COVID response on November 30.

S&P 500 down -2.3% on Friday

 S&P 500 (SPX ) weakened by -2.3% on Friday and closed the week at 4,594 points.

Data source: tradingview.com

If the price falls below 4,500 points, it would be a strong “sell” signal, and we have the open way to 4,300 or even 4,200 points.

The upside potential remains limited for the week ahead, but if the price jumps above 4,650 points, the next target could be around 4,700 points.

DJIA down -2.5% on Friday

The Dow Jones Industrial Average (DJIA) weakened -2.5% on Friday and closed the week below 35,000 points.

Data source: tradingview.com

The Dow Jones Industrial Average remains under pressure as news of a new COVID variant worried investors worldwide.

The current support level stands at 34,500 points, and if the price falls below this level, the next target could be around 34,000 points.

Nasdaq Composite down -2.2% on Friday

Nasdaq Composite (COMP) has lost -2.2% on Friday and closed the week at 15,491 points.

Data source: tradingview.com

The strong support level stands at 15,000 points, and if the price falls below this level, it could be a sign of a much larger drop.

Summary

Wall Street’s three main indexes ended sharply lower on Friday after the news that the World Health Organization designated a new COVID-19 variant detected in South Africa. All policy issues go on hold currently, and investors will pay attention to the government’s COVID response on November 30.

The post Dow Jones, the S&P 500, and Nasdaq price forecast after sell-off on Friday appeared first on Invezz.







Author: Stanko Iliev

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Economics

Wind Power Becoming too Cheap for Industry to Sustain Itself

The price of generating wind power has gotten so low, that companies may soon be unable to invest in additional
The post Wind Power Becoming too Cheap…

The price of generating wind power has gotten so low, that companies may soon be unable to invest in additional technologies for the sector.

According to major turbine-making company Siemens Gamesa, the cost of wind power has recently dropped to such a low level that it can finally challenge the fossil fuel industry, mostly due to an abundance of investments in renewable energy. “What we’ve clearly achieved is that wind power is now cheaper than anything else,” said the company’s CEO Andreas Nauen as quoted by Reuters.

However, Nauen warned that “we shouldn’t make it too cheap,” because it could hinder the influx of additional investments in the green space. Across Europe, both wind and solar are substantially cheaper that natural gas, coal, and even nuclear power. And, with governments’ strong ambitions to adopt a climate friendly agenda, the demand for wind turbines has reached a record-high; but, the relatively lower prices and increased competition have also eroded away at producers’ margins.

“We have probably driven it too far,” said Nauen, adding that if prices continue to decline, the sector won’t be able to invest in further innovations. To make matters worse, accelerating global inflation for raw materials, coupled with supply shortages, also threatens to squeeze turbine makers’ margins. Moreover, governments around the world have begun eliminating generous wind subsidies in favour of more competitive contracts submitted by the lowest bids.

“We need to change auction systems in the future,” said Nauen, suggesting that local job creation should be governments’ top priority, rather than just the lowest price.


Information for this briefing was found via Reuters. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Wind Power Becoming too Cheap for Industry to Sustain Itself appeared first on the deep dive.

Author: Hermina Paull

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