15/10/2022
Recession is now accepted as inevitable in 2023.
Today on ABC Melbourne radio (10:30am) with Lisa Leong Radio
we'll be talking around Recession and rates.
Recession is now accepted as inevitable in 2023
The CEO of the world’s biggest bank (JP Morgan) said this week; “These are very, very serious things … Europe is already in recession – and they’re likely to put the US in some kind of recession six to nine months from now”
US Federal Reserve; “We have got to get inflation behind us. I wish there were a painless way to do that. There isn't.”
While the CEO of the world’s biggest bank is worried, our very own RBA said this last week; ‘One source of uncertainty is the outlook for the global economy, which has deteriorated recently’.
KEY POINT- If everyone expects recession, then surely financial markets must have priced in most of the damage….maybe….if the central banks can tame inflation in a reasonable time..so perhaps there are opportunities…..prepare your shopping list.
SUMMARY;
1. Inflation remains stubbornly high
2. Interest rates moving up rapidly (Cash rate could be close to
4% next year and 5% in the US) Current cash rate is 2.60%
here and 3.25% in the US
3. Share prices and bond prices having one of their most volatile
years in history (up and down)
4. Currencies also volatile (USD +18% this year)
5. UK bond markets in turmoil
6. 2 weeks ago, RBA lifted rates by 0.25% not 0.50% - this was a
big deal
7. But the search for yield is over…however the search for safety
is driving markets
MARKETS ARE FORWARD LOOKING – they are already there (we hope) Share markets are trying to price in chances of recession (Hard or soft) and have fallen 25%.
Interest rate markets are trying to work out where the terminal rate (the rate where the RBA stops) this looks to be around 3.6% which is where the 3 year bond rate is. Current cash rate is 2.60%, so another 1% in rate hikes to come?
NAUTRAL RATE
Talk this week around the Neutral rate being about 2.5%
This rate reflects the level of risk-free interest rate in the economy that neither boosts growth nor stymies it. It is a guess and cannot really be explained. This is a economist’s term.
Not sure that financial markets really care about this because the economy never stands still or is in equilibrium.
(Economists were invented to make weather forecasters and astrologers look good)
FOR INVESTORS
The search for yield is now finished…we now have the search is for safety. Look at this....
10 year Govt bonds offers 4% risk free
CBA 5 Yr TD is 4% (2 yr is also 4%!!!)
CBA 5 Yr bond offers 6.4%
CBA 5 Yr hybrids is 6% and rising towards 7%
CBA shares trade at 5.5% grossed yield
Time to get some advice!
General Advice Warning...
Any of the advice we give here is general in nature and does not take into account your personal circumstances, financial situation or needs….…..you need to considered if this advice is appropriate
