26/07/2022
Current Economic Conditions
Bonds and equities, both local and global all suffered losses in the 2021/22 financial year as it is due to the impact of rising interest rate, long periods of COVID challenges and impact of the Russian-Ukraine War. As of 30 June 2022, S&P 500 posted losses of 11.1%, Dow Jones posted losses of 10.1%, ASX 200 posted losses of 10.2% and CSI 300 posted losses of 13.6%. The US 2 and 5 year bond yields were increased by 300bp and 162bp respectively. The Australian Bond yields are showing the similar trend, the 2 and 5 year bond yields were increased by 253bp and 213bp respectively. Bond price and bond yield are inversely related. As the price of a bond goes down, the yield increases.
The US consumer price was 9.10% over the year ended 2022, largest increase in 40 years. The outbreak of global inflation remains the major issue. The bond yields are likely to rise further, and higher yields will remain bad news for the equity market. According to the Reserve Bank of Australia website, the current inflation rate is 5.10% and the Cash rate target is 1.35%. RBA has tightened monetary policy by raising the cash rate target by 0.25% on 4 May, 0.50% on 8 June and further 0.50% on 6 July. The RBA is likely to continue to tighten monetary policy to help bring inflation back to a more acceptable level. The interest rate is still below neutral and there will be more rate rises moving forward and while this will put pressure on mortgage repayments which reduce household surplus income. According to Australian Bureau of Statistics website, the Consumer Price Index (CPI) rose 2.1% this quarter. Over the twelve months to the March 2022 quarter, the CPI rose 5.1%. This is due to higher dwelling construction costs and automotive fuel prices. This is the highest inflation since March 2009. If the inflation gets to 7%, an official cash rate will be at least 3.5%.
According to the Citi Multi- Asset Investment Clock, our place on the investment clock sits between 1 and 2 o’clock which are “Rising interest rate” and “Falling share price”. If the Interest rates continue to increase until it is no longer viable for purchasers to continue investing in property and soon supply outstrips demand. As interest rates rise, it impacts company cash flows and earnings which increase the likelihood of a recession. To slide into the recession zone, the commodity price will fall further. The Australian dollar is now at $0.6882 USD and it was $0.7499 USD on 30 June 2021. The Australian dollar could decline further by the end of this year if the commodity prices lower, global economy continue to slow down and rising interest rates.
Household consumption is the major driver of economic growth in developed economics. According to Australian Bureau of Statistics website, the total dwelling units approved was 15,487 in May 2022 reported. The trend estimates for total dwellings approved fell 1.5% in May, this follows a 1.2% fall in April. The US housing industry is indicating a downward momentum as its building permits fell 7% month-on-month in May and it is the lowest reading since September 2021. As the mortgage rate increases and real wages decrease, it will impact the retail sales.
Since the news on world inflation has continued to be negative, the interest rate continues to rise and the global market outlook becomes more problematic, the correction of the equity market does not seem to be over yet.
