Australian Economy

ASX falls ahead of RBA meeting, global stock markets slide after US employment report

Australian shares have started the day lower, taking cues from global equity markets after the US employment report on Friday indicated the Federal Reserve will likely continue on an aggressive monetary policy tightening path to curb inflation.

The RBA is expected to raise interest rates tomorrow and economist predict that rates would go up between 25 and 50 basis points.

According to RateCity, if the RBA hikes the cash rate by 0.25 percentage points, the average owner-occupier with a $500,000 debt and 25 years remaining will see their repayments rise by a further $66.

Technical assumptions in the RBA board minutes presume the cash rate could increase to 1.75 per cent by the end of the year and hit 2.5 per cent by the end of 2023.

If this happens, the same borrower with a $500,000 loan balance could see their monthly repayments rise, in total, by $652 a month by Christmas next year.

“The board may stick to a standard 0.25 percentage point hike, but there’s every chance it will be more hard-hitting,” said RateCity research director Sally Tindall.

“With petrol and grocery prices continuing to shoot up, the case for a 0.40 percentage point hike is strong.

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Why are big banks raising interest rates more aggressively than the RBA?

The ASX 200 was down 20 points, or 0.3 per cent, to 7,212 at 10:09am AEST.

At the same time, the Australian dollar was up at 72.10 US cents.

Among the worst movers at open were Zip (-4.4pc), Magellan (-4.1pc) and Block (-4pc).

However, Whitehaven gained 1.9 per cent, Beach Energy advanced 1.5 per cent and Woodside was up 1.6 per cent.

US jobs report beats expectations

Global equity markets fell on Friday.

Data showed the American economy generated more jobs than expected in May, signalling the Federal Reserve will likely continue raising interest rates in its effort to curb inflation.

The US Labor Department’s closely watched employment report showed the US economy added 390,000 jobs in May, with the unemployment rate holding steady at 3.6 per cent for a third straight month, beating most analyst estimates.

Traders were hoping the jobs report would reveal stronger signs of weakness in the US economy that would help persuade the Fed to soften its stance on inflation and interest rates to avoid triggering a recession.

“It was strength across the board with the exception of retail trade, and the economy on the jobs front continues to power forward,” said Josh Wein, portfolio manager at Hennessy Funds in Chapel Hill, North Carolina.

“The Fed still needs to unfortunately destroy a little bit of demand and they are going to continue to do that for at least the next few meetings with 50-point rate hikes.”

The MSCI world equity index, which tracks shares in 50 countries, was down 1.11 per cent.

The pan-European STOXX 600 index was also down 0.26 per cent.

On Wall Street, all three major indexes were led lower by sell-offs in the technology, consumer discretionary, communication services, financials and industrials sectors.

The Dow Jones Industrial Average fell 0.98 per cent to 32,923.57, the S&P 500 lost 1.57 per cent to 4,111.41 and the Nasdaq Composite dropped 2.46 per cent to 12,013.45.

“Some of the rally (in equities) of late was due to the Fed acknowledging that in the fall they could reassess and take a pause perhaps,” Mr Wein said.

“But the market is retracing some of their earlier losses and saying basically that’s all off the table.”

Oil prices rose, buoyed by expectations that OPEC’s decision to increase production targets by slightly more than planned will not affect tight global supply much and by rising demand as China eases COVID-19 pandemic-related restrictions. 

Brent crude was up, trading at $US121.41 a barrel by 10:07am AEST.


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