Australian and global equities markets have priced-in further monetary policy tightening from the world’s central banks amid mounting concerns over a drawn-out battle to return inflation to target.
The S&P/ASX 200 lost just under 2 per cent of its value last week, and opened trading on Monday (23 October) 56 points lower.
Across US share markets over the past week, the Dow Jones index fell 1.6 per cent, the S&P 500 slipped 2.4 per cent, and the Nasdaq slid 3.2 per cent.
According to AMP chief economist Shane Oliver, equities are down between 7–8 per cent from their July highs.
He said the risks of a further “lag down” in equities markets are “high” in the face of a raft of macroeconomic and geopolitical headwinds.
This includes recent hawkishness from central banks, including the Reserve Bank of Australia (RBA), stoking fears of further monetary policy tightening.
Minutes from the September meeting of the RBA’s monetary policy board included a reference to “low tolerance” for evidence of slower progress to the 2–3 per cent inflation target.
According to Luci Ellis, new group chief economist at Westpac and former assistant governor at the RBA, the central bank is sensitive to any notable changes to the inflation outlook.
“If the inflation outlook remains on its current trajectory, the board will keep the cash rate where it is. If the data start pointing to material risks of higher outcomes than that, though, they are very willing to move,” she said.
However, Westpac does not expect the upcoming quarterly inflation print to surprise markets, projecting an increase of 1.1 per cent in the three months to 30 September and 5.2 per cent in annual terms.
“It would have to be a significant upside surprise from this to dislodge the RBA board from an unchanged rates decision in November,” Ms Ellis added.
The quarterly CPI print is set to be released this Wednesday (25 October) ahead of the RBA’s next monetary policy board meeting on Melbourne Cup Day (Tuesday, 7 November).
Last week’s mixed labour market print is not expected to weigh heavily on the RBA’s determination, with a reduction to the unemployment rate (down 10 bps to 3.6 per cent) largely attributed to a reduction in the number of job seekers.
Just 6,700 Australians entered the labour market – well below market expectations of 20,000.
Labour market conditions are expected to deteriorate over the medium-term as the full impact of 400 bps in cumulative tightening from the RBA filters through to households.
As for the timing of rate relief, the Commonwealth Bank recently revised its projection for the commencement of monetary policy easing.
CBA had forecast cuts to the official cash rate by March next year but has now pushed back relief to June 2024.
“In our view, the most important decision for central banks in 2024 will be when to start cutting their policy interest rates,” the bank noted.
“The unexpected stickiness of inflation has encouraged us to delay when central banks start cutting from early 2024 to the middle of 2024.
“Further loosening of labour markets will be an important trigger for central banks to start cutting policy interest rates.”
CBA is projecting a cumulative 100 bps in cuts by the Reserve Bank by December 2024.
