In today’s Fat Tail Daily, After grim October performances, stocks rebounded this week — but don’t let that fool you; markets likely face further falls ahead. Dive into this week’s episode of What’s Not Priced In to explore last month’s ASX winners and losers, whether the RBA will continue mimicking the newly dovish Fed, and why another rate hike could inflict unnecessary pain on already struggling Aussie households.
Is the Federal Reserve done hiking?
Is the Reserve Bank done?
My What’s Not Priced In colleague Greg Canavan thinks the RBA will be fools to raise next week.
But he also thinks investors shouldn’t care.
Leave the rate guessing to macro nerds and day traders.
Value investors have more productive things to do.
Like finding oversold opportunities.
As we discuss in the episode, markets are not at a capitulation low yet. Don’t be surprised by further falls.
But opportunities still lurk.
Greg, for one, is buying some ‘smashed up’ sectors.
October wasn’t good.
The ASX 200 fell 3.6% that month, entering a technical correction. The S&P 500 entered one, too.
Both indexes rebounded this week. But the mood is still downtrodden.
Since early February, the ASX 200 is down ~8.5%. The index is down 9.5% since August 2021.
October wasn’t great, but neither have the last few years.
It’s a similar thing overseas.
The Nasdaq is down over 10% since an AI-led peak in July. The broad Russell 2000 is down over 15%.
As Greg covered last week, markets fear a rapid slowdown ahead.
So don’t let this week’s bounce deceive you.
October’s best and worst performers on the ASX
October’s best performer was gold.
Conflict in the Middle East played its part. But is there something else?
The question for gold bugs is this.
Is gold’s move purely a sign of geopolitical hedging? Or is gold sniffing weakness in the US economy and a fall in real bond yields?
We discuss at length in the episode.
Now, the worst performers were a mixed bag.
A couple of prominent lithium miners stood out, though. IGO and Liontown Resources.
Liontown suffered from Gina Rineheart nixing Albemarle’s takeover overtures.
But it was IGO who highlighted the sector’s broader issues.
Lithium prices are falling and demand is faltering.
In its latest quarterly, IGO spoke of the need to ‘manage surplus volumes’.
Chief executive Matt Dusci then admitted one of its mines will sell less spodumene in the next quarter than it will produce.
Not to mention the most shorted stock on the ASX right now is young producer Pilbara Minerals. Lithium peers Core Lithium and Sayona Mining round out the top 10.
IGO’s Dusci thinks lithium’s fundamentals ‘remain strong over the medium to long term’.
Short-selling interest suggests otherwise.
Psychoanalysing the Fed
US Fed officials unanimously voted to leave rates unchanged overnight. The funds rate remained between 5.25% and 5.5%.
The Federal Reserve hasn’t raised rates now for two consecutive meetings. The longest intermission since March 2022.
It left the option of another hike open. But the market was quick to read between the lines. What does this really mean?
Citadel Securities’ Michael de Pass offered this take:
‘They want to maintain a hawkish façade while believing deep down that they’ve probably done enough.’
Despite himself, Greg agrees.
The Fed’s power partly lies in managing expectations.
It wants people to think rates may still rise to curb any counterproductive exuberance whipped up by people expecting cuts.
Will Australia follow the Fed?
Going by market odds, the Reserve Bank is unlikely to follow its counterpart.
Money markets are assigning a 57% chance of a RBA hike next week. 33 out of 35 economists surveyed by the Australian Financial Review agree.
But Greg thinks another hike is absurd.
So why would the RBA even consider it?
A hotter than expected CPI print is one. Rising home values (and therefore household wealth) another.
Aussie home values are weeks away from a record high.
National house values rose 0.9% in October, according to the latest data from CoreLogic. Since a low in January, house values are up 7.6% nationally.
National home values only need to rise another 0.5% to set a record. CoreLogic eggheads think this is feasible by mid-November.
Will this play a role in the RBA’s upcoming rate decision?
Our new RBA governor, Michelle Bullock, addressed the Commonwealth Bank Global Markets Conference last week.
Later, she fielded questions on house prices.
Some snippets of her answers:
‘Housing prices are on the rise again and we know from history that rising housing prices tend to result in high consumption, so there’s that as well which is impacting things. So it is a balancing act and they’re the sorts of things we’ll be looking at, the inflation numbers obviously and our new set of forecasts.’
‘Household balance sheets on average, in aggregate, are pretty solid. They’ve still got lots of savings and they’re still saving. The savings rate in Australia is still positive. So, they’ve got lots of buffers, lots of saving. We are seeing housing prices rising again, so wealth is rising again, so household balance sheets in that respect are solid.’
The IMF butted in, too.
Michele Bullock and her predecessors have a tough job. The whole country has an opinion on where rates should be. And now it’s international institutions, too.
The International Monetary Fund urged the Reserve Bank to lift the cash rate in its latest annual report on the Aussie economy.
The IMF said:
‘Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential. Staff therefore recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimise the risk of de-anchoring inflation expectations.’
The IMF then recommended more coordination between Australia’s fiscal and monetary policy, something Philip Lowe mentioned in his last speech as governor.
If the Commonwealth Government doesn’t take a measured approach to fiscal policy, the RBA may have to raise rates ‘even higher’:
‘In that context, continued coordination between monetary and fiscal policy is key to securing more equitable burden sharing. The Commonwealth Government and state and territory governments should implement public investment projects at a more measured and coordinated pace, given supply constraints, to alleviate inflationary pressures and support the RBA’s disinflation efforts. Otherwise, interest rates would have to be even higher, putting the burden of adjustment disproportionately on mortgage holders.’
You must watch Greg’s reaction when I mentioned the IMF’s reasoning to him!
Case against RBA hike
But what’s the case against?
Greg thinks the RBA has done enough. Further hikes are unnecessary, inflicting pain for pain’s sake.
For one, living costs continue to outpace inflation for many households.
On Wednesday, the ABS released data on living costs. Living costs for employee households rose 2% in the September quarter, up from the 1.5% rise in the June quarter.
The growth was almost double the rate of the CPI, which rose 1.2% in the September quarter.
Mortgage repayments are hurting households. These repayments also explain the difference with CPI, which excludes mortgage interest charges.
Mortgage interest charges rose 9.3% in the September quarter after rising 9.8% in the June quarter.
That’s despite the RBA not increasing the cash rate since July.
What do we like to repeat on the show?
Monetary policy acts with a lag.
The flurry of punches the RBA threw at the start of the year to knock inflation out are starting to land.
Why throw more?
Enjoy the episode!
Editor, Fat Tail Daily