The Reserve Bank of Australia is widely anticipated to lift the cash rate to 4.85 per cent this Tuesday, with money markets implying an over 80 per cent probability of an increase. This expectation follows a week of hawkish commentary and a recent high inflation report. While a surprise hold is not entirely impossible, given last week’s unexpected move by New Zealand’s central bank, traders are largely focusing on whether this hike could mark the central bank’s final tightening move. Updates from ASX-listed retailers suggest consumers are facing headwinds, indicating a potential slowdown in the economy.
However, betting on an imminent economic turnaround is deemed a dangerous trade by some analysts. Morgan Stanley, for instance, recently cautioned clients against such bets, revising its forecast for a fall in national house prices from 10 per cent to 15 per cent, a view now becoming consensus. Their strategists warn that consumer-facing stocks remain vulnerable to further earnings downgrades and valuation declines. Channel checks and tax office data reportedly show increasing signs of small-business stress, suggesting a ‘different downturn’ that may prolong economic challenges for housing-linked retailers and domestic cyclical stocks.
Despite these cautious sentiments, Australian major banks surprisingly surged in value last month, registering gains of between 5 per cent and 10 per cent. This resilience is partly attributed to their robust positioning compared to previous cycles and, ironically, the ‘AI bloodbath’ in global markets. Asian hedge funds, who had funded bullish AI positions via Korea’s tech-heavy KOSPI index by shorting banks, have been forced to unwind these trades, buying back bank shares. This suggests that a deceleration in AI investment, which contributed to higher-than-expected growth, could ease inflationary pressures globally, potentially obviating the need for further interest rate increases.
