Interest rate hikes, inflation - what it means this week for the ASX

Company News

by Melissa Darmawan

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This week's focus is the Reserve Bank of Australia board meeting tomorrow and the central bank's response to combat two decade high inflation. 

One of the central bank’s tools to curtail inflation is by raising interest rates. After the central bank raised its base rate in May by 25 basis points to 0.35 per cent for the first time since 2010, tomorrow the Reserve Bank of Australia is set to meet with economists betting between a 40 basis points to 85 basis points hike.

Also contributing to further volatility is the US Federal Reserve shrinking its US$8.5 trillion bond portfolio. We are approaching the second week - yes, it's just the beginning. This means that the central bank is going to let bonds mature each month without replacing them. Therefore, the liquidity that helped equities hit fresh record highs will no be zapped out of the market over time unless there are countries or buyers who buy at large further US debt. The Reserve Bank of Australia is also going to do the same and let bonds roll off as well as per last month's statement.  Even though this is about the US, if the ASX takes its lead from the Wall St which has been recently, don’t be surprised if you see treasury yields tap higher and equities move lower.

Meanwhile, S&P Dow Jones Indices announced its June quarterly rebalance last Friday. Therefore in the lead up to the opening bell on Monday 20 June, fund managers and ETF providers will be buying and selling out of companies to reflect the changes. Another factor to consider which can also contribute to further choppiness in the market.

Add to that, investors could also be crystallising their positions before 30 June - the end of the financial year. That means further selling but could also mean buying opportunities too.

On the data front, the March quarter labour account, the US consumer price index on Friday will also be front of the minds of investors which means that there will be caution exercised.
 
Sources: Bloomberg, S&P Dow Jones

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