Charts and caffeine: Why faster RBA hikes may spell bad news for CBA shareholders

The Morning Wrap

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.


The macro calendar was hush overnight but the big event is still to come - UK CPI. Fed Chair Jerome Powell is also making his semi-annual testimony to Congress later this evening.

  • S&P 500 - 3,765 (+2.45%)
  • NASDAQ - 11,547 (+2.49%)
  • CBOE VIX - 30.19
  • FTSE 100 - 7,152 (+0.42%)
  • STOXX 600 - 408.60 (+0.36%)
  • USD INDEX - 104.42
  • US10YR - 3.284%


We look for the RBA cash rate to reach 3.1% by end-2022, and for unemployment to rise by 1% by end-2023. That increase in unemployment, if realised, will be enough for us to call a recession in 2023. 

Phil O'Donaghoe at Deutsche Bank has not minced words with his latest call on the Australian economy. Phil argues that the RBA only needs to see unemployment increase to a sub-5% level for a recession to occur. At that point, the Reserve Bank will have to start cutting rates... again.

(Note: CBA's Gareth Aird has a similar view on the first rate cut, but not the likelihood of a recession.)

More of Phil's note is included below - which includes a change in the size of the RBA's rate hikes to come. See if you can spot which other central bank they may need to emulate. 

We continue to look for a 50bp hike in July, but now introduce a 75bp hike in August (after the Q2 CPI). We then expect 25bp hikes at each meeting from September through to December, leaving us with an end-year, and terminal rate, forecast for the cash rate of 3.1%.

stocks to watch

Given there are more calls now for a recession in the US (and in the above case, now at home), Morgan Stanley has turned cautious on the big banks. Despite a near-20% fall in the financials index since the first RBA rate hike, they have cut price targets and earnings estimates even further. 

Weren't rate hikes meant to be good for the banks? (Source: Morgan Stanley Research/ASX)

Here is their thesis: 

We believe that a "quick and aggressive" tightening cycle provides more support for margins, but will also lead to a weaker housing and mortgage market and a higher probability of recession.

But here's where things get really interesting. The team has put together a "soft" or "hard" landing scenario for each bank based on the projected rate hikes of the Reserve Bank. Here's what they have come up with:

We estimate that current share prices imply a ~65% probability of recession at WBC and a ~40% probability at ANZ and NAB. However, CBA is still priced for a soft landing.

In other words, a steeper yield curve will be better for Westpac and the worst for the Commonwealth Bank. All four price targets have also been downgraded, with the results of that listed here:

The new price targets.


It's been a pretty damn good year to be an energy investor. Even if you've been caught up in the US market rout of late, you're still way ahead of the ASX energy index - and more importantly, the global equity benchmark. The big question is how this outperformance will be reflected in corporate earnings down the line - starting in August with the ASX. Could we expect to see another push higher because of potential buybacks and hiked dividends? (Source: Bell Potter)


What is it that Rudi Filapek-Vandyck likes to say? The majority is wrong eventually, almost every time? Well - if that holds up for this call - then equity bulls should be cheering. 


Are thematic ETFs worth the hype? (Livewire): FOMO is a dangerous thing. While they are set to stick around, it certainly won't be for everyone - as my colleague Sara Allen has found out.

Israel Heads for New Poll as Coalition Moves to Dissolve Parliament (WSJ): If you think you're sick of elections in Australia, spare a thought for Israel. They are about to go to their fifth ballot in three years.

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The Morning Wrap
Markets Wrap
Livewire Markets

Livewire and Market Index's pre-opening bell news and analysis wrap. Available weekday mornings and written by Chris Conway, Kerry Sun, and Hans Lee.

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