The ASX is lower today, dragged lower by Technology and Healthcare.
The benchmark S&P/ASX200 lost 36.00 points or 0.54% to 6,651.10. Over the past five days, the index has gained 0.68%, but is down 10.66% since the start of the year.
The worst performing stocks in this index were XERO Ltd down 6.38% and Megaport Ltd (ASX:MP1) down 6.07%.
In the news today
RBA Minutes Talk Interest Rates, Home Loan Inflation and the Economy
The Reserve Bank of Australia released its minutes today, covering a range of topics.
Inflation
Let’s start with inflation which it predicts will peak later in 2022, before dropping back down to the 2-3% range in 2023.
“Inflation is expected to moderate as global supply issues continue to ease and commodity prices stabilize, albeit at a high level,” the minutes of the RBA’s July meeting said.
“Higher interest rates will also help establish a more sustainable balance between demand and supply for goods and services.”
Interest rate
“Members agreed that further steps should be taken to normalize monetary conditions in Australia over the coming months.
“The size and timing of future interest rate increases will continue to be guided by incoming data and the board’s assessment of the outlook for inflation and the labor market, including risks to the outlook.
“The Board remains committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
According to Westpac’s Bill Evans, the Aussies could be looking at a 50 basis point raise in August.
“The option of a 25 basis point hike is being quickly ruled out, the economic outlook is good, while the need to contain inflation expectations is paramount,” he said.
“Another 50 basis points in August seems highly likely.”
The 25 basis point hike in June was “a steady approach to withdrawing monetary policy stimulus and which was appropriate in an uncertain environment” and when “some central banks had raised their policy rates in increments of 50 basis points , these central banks meet less frequently than the Reserve Bank Board….overall, members agreed to an adjustment of 50 basis points.
For July, “members considered the option of raising interest rates by 25 basis points or 50 basis points” and “agreed that the case for raising interest rates by 50 basis points were stronger”.
Evans said: “The level of interest rates was still very low for an economy with a tight labor market and facing a period of higher inflation. Members agreed that further steps should be taken to normalize monetary conditions in Australia over the coming months.
The neutral rate
Asked about the so-called cash neutral rate, RBA Deputy Governor Michelle Bullock said: “We estimated – it’s a wide range of estimates – but we thought it could (be a) real rate between half a percentage point and one and a half percentage points.
“So somewhere in that range. It’s quite a range. But it’s really just the real component. The nominal rate that’s in that is going to depend on inflation expectations, and inflation expectations are also very difficult to measure.
“These are our most recent estimates, but it’s really very difficult.”
“What we do know is that we’re probably well below (neutral).”
Australian households
According to Bullock, households are well positioned for rate hikes.
“Much of the debt is held by high-income households who have the capacity to repay their debt and many borrowers are already repaying well beyond what is required,” Bullock said.
“Plus, those with very low fixed rate loans have some time to prepare for higher interest rates.
“Some households will find that interest rate increases will impact their debt service burden and cash flow.
“While the current strong job growth means people will have jobs to service their mortgages, how the risks materialize will be influenced by the future trajectory of job growth.
“This, along with the board’s assessment of the outlook for inflation, will be important considerations in deciding the size and timing of future interest rate increases.”
National Economic Outlook
“Timely data indicated that domestic demand growth remained solid in the June quarter, driven by household spending,” the RBA Minutes said.
“Although consumer confidence has declined significantly, household consumption has been supported by the growth in disposable income, the increase in savings and wealth that occurred earlier in the pandemic, and the rebound discretionary spending on services.
“The pipeline of residential housing construction and infrastructure activities remained strong, although capacity constraints were slowing the rate at which the pipeline could be operated, and business surveys and information from the City Liaison Program bank suggested that the investment intentions of non-mining companies remained at or above average levels.
“Members agreed that the outlook for domestic economic activity had softened somewhat, with a key source of uncertainty related to household response to higher inflation, higher interest rates and lower real estate prices in some cities.”
Here’s a look at some of the best small cap stories of the day.
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That of good fortune
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look
