Investment markets and key developments

Global share markets mostly fell over the last week with more hawkish commentary from Fed Chair Powell. While Australian shares were initially boosted by a hawkish RBA they succumbed to the global weakness to be down around 1.8% for the week with falls in resources, health and financial shares. Bond yields mostly fell as did oil and metal prices, but the iron ore price rose. With a more hawkish Fed and less hawkish RBA the $A fell as the $US rose.

Fed Chair Powell confirms the Fed has becomes more hawkish in the last month. This reflects the recent run of stronger than expected economic data with inflation falling more slowly than previously indicated. As a result, Powell indicated that the peak level of interest rates is likely to be higher than previously expected and if warranted the Fed is prepared to step up the pace of rate hikes again. At its December meeting the Fed dot plot of officials’ interest rate expectations indicated a peak of 5-5.25% but this now looks likely to move up to 5.25-5.5% at this month’s meeting. Job openings data for January didn’t cool much but providing the totality of data for payrolls, inflation and retail sales is cooler then the Fed will stick to a 0.25% hike at its 22nd March meeting, with Powell also noting that the slower pace of rate hikes enables it to better assess the lagged impact of past hikes. If the data is mostly still strong then it’s likely to step up to +0.5% again.

While recent data has confused the picture a bit our view is that the US economy will continue to slow – with most leading indicators including the yield curve still pointing down – and that this will flow through to a further slowing in inflation – with our Pipeline Inflation Indicator continuing to point down. Ultimately this should enable the Fed to stop tightening before triggering a deep recession, albeit the odds of a mild recession are high.

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