Switzer on Saturday

Are interest rate rises over? They should be!

Founder and Publisher of the Switzer Report
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On Wednesday, Wall Street wanted to be stressed about the possibility of a recession. On Thursday, stock prices were up because the US labour market looked like it’s finally cracking under the weight of the Fed’s heavy-handed interest rate rises. And that has market players pondering whether the US central bank, like our RBA, was close to the end of the interest rate rise cycle.

However, the jobs report, released on Good Friday when the US stock market was closed for the public holiday, actually showed those fearing a significant recession could be on the cards that the Yanks’ economy is stronger than was expected.

Economists predicted 238,000 jobs to be created in March and 236,000 showed up. And unemployment fell from 3.6% to 3.5%. This pushed up bond yields, as the US bond market worked until lunchtime on Friday and the S&P futures went up.

This makes a quarter of a point rate rise from the Fed more likely in May. Only a big drop in the Consumer Price Index next week would stop that likely event happening.

Before these better-than-expected employment numbers, powering the idea that rate rises could be over was a weak week for labour market data. Jobless claims for the week were bigger than expected, while the ADP private sector payrolls fell faster than was tipped and the available positions count was under 10 million in February, which hasn’t happened for two years!

I liked this take from Jamie Cox at Harris Financial Group: “The Fed built a wall with interest rates and now the economy is running into it.”

The jobless claims in particular “lends credence to the idea that the Fed’s rate hikes are beginning to cool down the labour market and slow down the economy,” said Chris Zaccarelli, CIO at Independent Advisor Alliance. “The odds are much higher that it will cause a recession – and even a significant recession – than most people are currently willing to believe.”

So the fear of a recession helped the Nasdaq rise 0.76% on Thursday. That was been driven by speculation that rate rises will soon be over or they might already be a thing of the past.

If you think this looks a bit confusing with stock markets rising on recession fears, you’re right to be confused. Investors want a slower US economy, without a deep recession, with falling inflation and rate rises over. Big sell-offs will be linked to significant recession fears or too high inflation and still rising interest rates. Hence the confusion, which isn’t helped by the unreliability of monthly economic data.

Helping these growing recessions fears has been the bad bank black cloud overhang, but the reality is that upcoming data drops will determine how the Fed plays rate rises. And what it does will have an impact on what Dr Phil Lowe and his board decide in coming months.

Not helping the confidence of economists like me, who think “enough is enough” with rate rises, with a mortgage cliff looming locally, for those who’ve had home loans with fixed rates for two or three years, was the 0.5% cash rate rise for the Kiwis this week.

Reuters headlined this hike, which took the cash rate to 5.25%, with “RBNZ stuns market with bigger rate rise, more tightening expected!”

Our cash rate is 3.6%. Our inflation rate is 6.8%, while the Kiwi inflation reading is 7.2%, which implies our cousins across the ditch are copping it tougher than us. And they could be in for a harder landing than us too, with a recession more likely in NZ, given its current cash rate.

At home, Chris Joye (from Coolabah Capital and the AFR) is pondering whether the RBA’s rate rise cycle is over. He isn’t firm in his view, writing: “Although Martin Place has paused its tightening cycle, the risk of further rate increases has not completely disappeared.”

This is his most positive offering for those sweating on no more rises: “Most hope that this is the end of the cycle, which it could easily be. The bond markets certainly believed until yesterday’s US job figures that this was the case and even here bond prices suggest the RBA cash rate is expected to be 25 basis points lower by December.”

It’s a similar story in the US, with the bond market tipping the Federal Reserve will cut rates by about 100 basis points by January! That guess could change if the March jobs report isn’t trumped by other economic data that says the labour market numbers are unreliable for guessing what inflation is doing. That CPI reading on Thursday morning our time will be important for stocks.

Unfortunately, Joye looks at the history of central bank pauses that then gave way to further rate hikes. Here he is again: “The RBA’s past two tightening cycles were punctuated by pauses. Between 2009 and 2010, the RBA lifted its cash rate from 3 per cent to 4.75 per cent, which was extended by a pause over five consecutive meetings between May and November 2010. In the much more protracted cycle between 2002 and 2008, which involved Martin Place raising rates from 4.25 per cent to 7.25 per cent, there were very long pauses, including three elongated windows that persisted for 12 months or more.”

At the end of the day, what the Fed and RBA do will depend on data, and this in turn will impact what happens to the economy and stock market. The only believable speculation is that we look closer to the top of this stock price challenging interest rate rise cycle this week than we looked a few weeks ago.

As I’ve said, the consumer and producer price index readings, hot on the heels of that jobs report, will be an important start for building the case that central banks have done enough to kill inflation and (possibly) not KO’ing the economy into recession.

To the local story, the S&P/ASX 200 lost 22.3 points (or 0.31%) to 7214.90 on Friday, which was a 0.55% gain for the four-day week.

What I liked

  1. The RBA Board left the cash rate on hold at 3.6%, with CommSec saying that forward guidance has further shifted in a dovish direction and 3.6% may be the terminal rate in this cycle.
  2. The trade surplus rose to A$13.9 billion in February this year, the third largest monthly surplus on record. Imports fell by 9.1% driven by a large fall in passenger vehicles. That’s a good inflation is falling sign.
  3. New lending for housing fell by 0.9% a month in February this year, which again helps the RBA think about not raising rates much more.
  4. Building approvals rose by 4% in February this year but remain lower by 31.1% over the past year. While it’s good for inflation that the building sector is much weaker, the small rise suggests we could see a slower economy and not a recession.

What I didn’t like

  1. Australian national average home prices rose by 0.6% in March, lifting for the first time since April last year (before the RBA started lifting interest rates). I like home prices not slumping as predicted by many but it could worry the RBA into more rate rises!
  2. AMP says: “The US ISM manufacturing indexdisappointed in March, with the index down by 1.4 points to 46.3, which is close to recession-like levels (see the chart below) and the prices paid and employment sub-indices both fell. Theservices ISM index for March also surprised lower, falling to 51.2 from 55.1.”
  3. Fed speakersremained hawkish, with Cleveland President Mester saying that interest rates should be kept above 5% this year, pushing back on market pricing of rate cuts in late 2023.

Sayonara from Tokyo

I often ignore Japan but Japan’s Tankan manufacturing business survey was weaker than expected in the March quarter, while “non-manufacturing” was better. Non-manufacturing implies services and I’m writing this from Tokyo, where the place is buzzing with tourists and cherry blossoms! And everyone seems to go to work if the morning trains and packed Starbucks are any guide!

Top stories this week

From the Report

 

Stocks Shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

 

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