Fed raises interest rates to 16-year high, Powell hints at a pause, ASX set to fall

Deeper Dive

The Fed raised rates by 25 bps as expected and softened its rate guidance by removing the "some additional policy firming may be appropriate." Here are some of the key takeaways and quotes from the hike and press conference:

• The Fed is ready to pause but does not want to cut rates as inflation remains well above target. It does not want to cut and then be forced to increase rates again
• Powell downplayed the banking crisis: "Conditions in that sector have broadly improved since early March and the US Banking system is sound and resilient. We will continue to monitor conditions in the sector."
• On inflation: "Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go."
• On rate cuts: Powell said inflation was coming down "not so quickly" and that "it would not be appropriate" to cut rates
• On recession: The Fed's base forecast is a mild recession in the second half but Powell said he expects the economy to continue to grow at a modest rate this year
• On restrictive rates: Powell said that more data will be required to determine whether or not 5.0% to 5.25% is sufficiently restrictive enough

RBA Recap & More Central Bank Action

Tuesday's RBA decision was correctly predicted by just nine of the 30 economists surveyed by Bloomberg. The rates market priced just a 12% chance of a rate hike. But the Board went against the grain and hiked rates anyway (not that Coolabah Capital's Christopher Joye was surprised). It turns out the "long and variable" lags of monetary policy is really just 30 days! Or as Morgan Stanley put it:

"The month to month pivots in RBA communication this year have made it difficult to extrapolate meeting communication."

We'll know some more about why they hiked when the local Statement on Monetary Policy drops on Friday. The SoMP (as the industry calls it) will contain the latest summary of economic projections from the Bank's economists.

But if you thought that was the end of the central bank action, think again. There are two more major bank decisions on the way:

• The European Central Bank is also widely expected to hike rates by 25 basis points but in this case, the risk is still material that they will go by 50 basis points instead due to sticky inflation and very tight labour markets.
• Then, it's on to the Bank of England next week where interest rates are at 4.25%, inflation is over 10%, and more than a few analysts think that they will pause rate hikes. What?!

Earlier this week, Livewire's Ally Selby penned some key takeaways from the latest Macquarie equity strategy note. Today, it's the turn of UBS who has decidedly turned more bearish than in previous months.

"The challenges that active managers are facing look set to remain in the near term through a period where we believe the RBA's 'rate plateau' will keep equities stuck in a range."

They add five more points which investors in some widely-held stocks may be interested in noting down:

1. When investors crowded into defensive names through the pandemic period, it made sense given the unparalleled experience of the time. But for investors to still be paying such large premiums for the ASX's most defensive stocks such as Woolworths (ASX: WOW)  and Telstra (ASX: TLS) makes less sense to us.

2. "We find that fund managers of Australian equity portfolios are on average currently holding a ~3% weighting in cash. This reflects less risk aversion versus the 4% levels reached in early 2020."

3. "Equities are being increasingly driven by macro forces... while stock specifics become somewhat dismissed."

4. "A lack of conviction from equity investors is also shown through the extent to which gold has become the dominant macro driver of Aussie equities returns over the last 6 months."

Corporate activist Carl Icahn’s fortune fell by more than US$10 billion after short-seller Hindenburg Research accused him of using a “ponzi-like” economic structure at his investment company. Hindenburg also detailed the investor’s margin loan collateralised by his stake in the company. All told, Icahn’s fortune fell to US$14.6 billion.

Start a GoFundMe, guys.

ASX corporate actions occurring today:

• Trading ex-div: Jupiter Mines (JMS) – $0.012, Om Holdings (OMH) – $0.015, Waterco (WAT) – $0.05
• Dividends paid: Arena REIT (ARF) – $0.042
• Listing: None

Economic calendar (AEST):

• 11:30 am: Australia Balance of Trade
• 11:45 am: China Caixin Manufacturing PMI
• 10:15 pm: Eurozone Interest Rate Decision
• 10:30 pm: US Balance of Trade

This Morning Wrap was first published for Market Index by Hans Lee and Kerry Sun.