At 2.30pm yesterday afternoon, the RBA shocked the market when it announced that it would raise the cash rate by 50 basis points, double the anticipated 25 basis point rise.
At 2.30pm yesterday afternoon, the RBA shocked the market when it announced that it would raise the cash rate by 50 basis points, double the anticipated 25 basis point rise. There is now growing consensus that we might see another 50-basis point rise in July, with the RBA clearly fast-tracking its pathway to neutral rates as inflation has continued to surprise to the upside.
What does this mean? Well, for everyone looking at the bond market, expectations of a faster tightening cycle have largely been expected even if the moves month by month were harder to predict. The RBA has been behind the curve for some time now, and yesterday only confirmed it was in the same reality that bond markets have been pricing in. Interestingly, big moves in bonds and the currency have largely been unwound after the decision was announced, and the consensus on long-term interest rates seems to be unchanged. The big change, however, is that the RBA is front-loading its tightening cycle which would either mean that rates peak sooner, or that possibly, if growth takes a big hit, we could see rates start to head lower again in 2023 (according to UBS) or 2024.
Not surprisingly, rate sensitive stocks (such as tech and REITs) took a hit after the announcement even though typically they follow moves in US interest rates which are seen as a leading indicator. Having said that, some of that sell-off has been reversed this morning on strength in the US overnight. However, it is interesting to note that the banking sector sold off yesterday afternoon and has experienced further selling this morning. The banks have been trading at elevated levels despite broader market weakness on the stronger outlook for net interest margins (NIMs) with rising rates, but we have argued that there could be downside risk for the banks if the tightening cycle starts to impact the housing market. There are broad predictions of falls in the housing market between 10% to some more extreme predictions of 35%. Our personal view is that the RBA tightening cycle will be done with the housing market in mind (so we don’t subscribe to the more extreme views), but those risks have been ignored by the banking sector to date, so some selling is not unwarranted.
So, outside of the likely short-term pressure for the banking sector, we don’t think yesterday’s announcement will have any lingering effects. The market is, as always, forward-looking and has been expecting the tightening cycle to quicken. The main game will be ensuring you are fully invested before the cycle ends, as many of these beaten down sectors will rally long before we see rates peak or start to lower again.
