Hike rates

Central banks are preparing to raise their rates again, but by how much?

The ASX hit seven-week highs before falling in the afternoon session.

The S&P/ASX200 gained 66.20 points or 0.98% to 6,851.90, topping its 125-day moving average. Over the past five days, the index has gained 1.07%, but is down 7.96% since the start of the year.

The best performing stocks in this index are Home Consortium Ltd and Graincorp Ltd, up 8.09% and 7.73% respectively.

Among the sectors, only energy was in the red with a decline of 0.69%, while information technology and consumer discretionary were the biggest drivers up 2.36% and 2.30 % respectively.

This week, all eyes will be on cash rate movements as the Reserve Bank of Australia (RBA), bank of england (BoE), the Fed and the European Central Bank (ECB) meet.

In Australia, a 25 basis point hike is expected, but a 50 basis point hike is not out of the question after the release of CPI data last week.

An increase of 75 basis points is expected by the BOE on Wednesday, as expected by the Fed and the ECB.

In the news today

Retail sales figures could push the rate higher than expected

September’s 0.6% rise in month-over-month retail spending was slightly better than expected, with gains driven by higher prices rather than volume spending.

Retail sales rose from August to a record 35.1 billion Australian dollars ($22.48 billion).

Data from the Australian Bureau of Statistics (ABS) shows that food, clothing and catering are surprisingly resilient in the face of soaring inflation and rising interest rates.

“Many retailers stayed open for the National Day of Mourning, an additional public holiday in September, and this boosted food, alcohol and restaurant spending,” said Ben Dorber, head of retail statistics at the ABS, referring to a public holiday to mark the passing of Queen Elizabeth.

Analysts are predicting a rise of 0.25% when the RBA meets tomorrow, but it could be as high as 0.50% based on today’s retail figures.

However, the full effect of past rate hikes has yet to be felt in the economy and the RBA is expected to maintain the more conservative course.

“The optics of slowing the pace of tightening in October and then accelerating it the following month would not look good,” said Gareth Aird, head of the Australian economy at the CBA. “And such a move would send a very confusing message to households and businesses.”

Westpac believes today’s data indicates “rate hikes are starting to have an impact.”

Nominal sales rose 2.3% in the September quarter, “a strong result but down from the strong 3.2 in the second quarter,” Westpac chief economist Matthew Hassan said.

“As we now know from the third quarter CPI, prices accounted for most of the increase in the quarter, with retail prices likely up around 2% quarter-on-quarter.

“Friday’s final detailed retail release will include official estimates of actual third quarter sales which will show a much more moderate gain in volume.

“While the price effects are difficult to disentangle, the details suggest that there could be a rate-raising effect that will come on top of the direct ‘erosion’ effect of higher prices.

“The slowdown in household goods retailing – just up 0.3% for the whole of the third quarter – and more subdued sales in New South Wales and Victoria both suggest some sensitivity. to interest rates.”

CommSec Chief Economist Craig James pointed to the growing evidence that consumers are cutting back on spending.

“In nominal and real terms, spending at department stores and home goods retailers likely fell in September,” James said.

“At the same time, inflationary pressures are easing. The latest data confirms our belief that the Reserve Bank will raise rates by just 25 basis points tomorrow.”

Financial commentator Peter Switzer disagrees.

“I don’t want him (Governor Philip Lowe) to do it, but I suspect he might think ‘a big hit,'” Switzer told Sky News.

“They must scare away the Australian consumer. This number of 7.3% was larger than expected. He could easily opt for the 0.5%.

So what will the RBA do?

Scott Solomon, Associate Portfolio Manager of T. Rowe Price’s Dynamic Global Bond Strategy, said: “We expect the Reserve Bank of Australia (RBA) to stick to the plan and increase by 25 basis points (bps) at the November meeting.

“The recent hot CPI release increases the risk of an upside surprise but, in reality, a move to 50bps would mean a sharp reversal in RBA thinking.

“Governor Lowe intends to allow the effects of previous hikes to carry over to Main Street. He is fully aware that many mortgages need to be reset in the next two months and does not want to burden the population unnecessarily.

“Furthermore, he is quite proud of the levels of employment achieved by the Australian economy and has no desire to destroy them prematurely.

“I expect the market to focus its attention on the updated economic projections to be released within days of the RBA’s decision.”

What’s next for the Australian market

“October has been a good month for the All Ordinaries index with our market up more than 5% so far,” writes Dale Gillham, founder and chief analyst at Wealth Within.

“While on the surface this rise may look very good, it only happened in the early days of this month. Since then, we have seen large swings up and down as market sentiment continued to be undecided, as if waiting for news to choose a direction.

“Last week, the market advanced early in the four days to close well off the day’s high, indicating that indecision is still very much present. It’s as if day traders are locking in their profits towards the end of the day. because they lacked the knowledge and/or confidence as to what the market will do the next day.

“The bulls have taken the market to its highest level in over a month and it looks like they are slowly gaining ground. Unless the market closes lower on Friday, I expect it rises next week.If that happens, the likelihood of a sustained rise over the next few months is much higher.

“While I don’t like to be a doomsayer, we still have to tread carefully as the market has been inclined to do the unexpected over the past couple of years. As such, we still have to assume that the low of 6,581 points in June could be questioned.

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