US Fed increases Interest Rate hike; ASX moved up

Highlights:

• The Federal Reserve witnessed another hike in its interest rate, but at a steady pace of 0.25 percentage points.
• The U.S. economy remains in the middle of a spinning recession with consumer goods and housing related segments in recession.
• The Australian stock market finished higher for the second consecutive session.

On February 2, 2023, the Federal Reserve announced another hike in its interest rate, but at a steady pace of 0.25 percentage points. Other than raising interest rates, the Fed has also been selling off massive components of its bond portfolio. The 10-year Treasury note, at about 3.5 percent, is now below its 52-week high of 4.33 percent, which was impacted just in October. As the Fed continues to raise short-term rates, this suggests that the investors are now preparing for a recession in the comparable period. In the beginning, stocks sold off, even before presenting a rebound during the press conference. As a surprise, the bonds faced a similar fate, along with the two-year Treasury yield exploding higher to almost 4.25% before drowning low to nearly 4.1%. For now, the U.S. economy remains in the middle of a spinning recession with consumer goods and housing segments related to the recession. However, more robust services spending is serving as a positive balance for now.

The National Bureau of Economic Research declared that an "official" recession remains a risk given the messages emerging from the profoundly inverted yield curve and the 10-month plunge in leading economic indicators.

The Australian stock market finished higher for the second consecutive session on Thursday, following a positive lead from Wall Street overnight after the Federal Reserve raised its interest rate by the expected 25 basis points, with a market rally led by shares in tech, retailers, and realty sectors.

 On February 1, IMF, in its executive board assessment of the Australian economy released, said: “With a positive output gap, a tight labor market and high inflation, further monetary policy tightening, complemented by fiscal consolidation, is warranted.” However, the report added that “monetary policy needs to continue tightening in the short term as envisaged, but given considerable uncertainty”. The International Monetary Fund (IMF) has concluded that Australia's economy is "on a narrow path to a soft landing with downside risks" and said interest rate hikes are justified in the short term to manage inflation increase. The Federal Reserve has raised interest rates by 25 points to keep inflation down by making borrowing significantly more expensive. Further the “uncertainty regarding the speed and intensity of monetary policy transmission, the pace of rate increases should continue to be data-dependent”. The RBA has raised the cash rate from 0.1% at the beginning of 2022 to 3.1% after eight successive meetings to reduce inflation.

The annual inflation figure was released last week and resulted at 7.8%, which confirms the RBA will uplift rates again within a week. The RBA is focusing on an inflation target between 2-3%. According to the Australian Bureau of Statistics, Australia’s total approved building approvals rose to 18.5%, much higher than the 1% increase expected by economists in a Reuters poll.

Meanwhile, private sector house approvals fell 2.3%, whereas approvals for private sector buildings excluding houses, rose by 56.6%. Non-residential buildings’ value fell by 1.7%, while the value of entire buildings rose by 3%. Investors are now keen on the policy decisions from the Bank of England and the European Central Bank later in the day and on Tuesday from the Reserve Bank of Australia Conclusion. The Australian central bank is widely anticipated to deliver a fourth consecutive rate hike next week. It is now expected that the Fed funds rates will peak just under 4.9% by June, as earlier expected a peak below 5%.

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