For several months, we have advocated that US rates will not go down anytime soon, and the same in Australia. On Thursday, we have the Federal Reserve decisions on interest rates, and then on Friday, we have Non-Farm Payrolls. Stubborn inflation, a tight labor market, and easing US Consumer Sentiment are three aspects that need to be discussed below.  In Australia, the market is awash with chatter about three more increases in interest rates, and the cash rate is potentially heading from 4.35% to 5.10%. Are we heading for a recession? Or is this a recession we must have to help reduce core inflation, ease the tight labor market, and soften the cost-of-living crisis? To manage this, the RBA must be careful not to make a recession any harder than it should be. An Interest rate of 5.5%, which is where the world is going, would cause significant hardship for variable-rate mortgage owners. The RBA has its job cut out for itself. We expect markets to respond accordingly negatively as three increases have not been factored into the market. This has been a core theme of our investment strategy for the last few months. On the Geopolitical front, there are concerns about some fallout from Russia, as the US increased military support for Ukraine over the weekend. Russia is still a significant energy supplier to Western Europe. Oil seems to have hit a range albeit still has a bid tone as Israel and Hamas go to Egypt to commence ceasefire talks. 

But first, the assertion that US rates will not decrease in the near future and perhaps increase is grounded in several economic factors and policy considerations. Firstly, the Federal Reserve(FED) typically adjusts interest rates based on its dual mandate of promoting maximum employment and maintaining stable prices. With the US economy experiencing stubborn inflation and a tight labor market, there's little impetus for the Fed to lower rates, as doing so could potentially exacerbate inflationary pressures and lead to overheating in the labor market.

Moreover, the Fed monitors consumer sentiment, significantly shaping economic activity and inflation expectations. Despite easing US consumer sentiment, other economic indicators such as rising inflation and robust job growth suggest that the overall economic outlook remains relatively strong, providing further rationale for the Fed to keep rates steady or potentially even raise them to cool off inflationary pressures.

Additionally, global economic dynamics, such as geopolitical tensions and fluctuations in commodity prices, can influence the Fed's decision-making process. For instance, heightened geopolitical tensions, such as increased military support for Ukraine and concerns about fallout from Russia, may contribute to market volatility and uncertainty, prompting the Fed to maintain a cautious stance on interest rate policy to mitigate potential risks to economic stability.

Overall, this Thursday, we feel US rates will remain unchanged; however, we will monitor the wording from the FED for signs as to when rates will be going down. However, we suggest it will be later in the year, not in June as the market expects. US Non-Farm payrolls on Friday will also be a catalyst for change. 

The renewed anticipation of interest rate increases in Australia has gained traction amidst evolving economic conditions and policy deliberations. The Reserve Bank of Australia (RBA) did the wrong thing by property investors two years ago, and it looks like we are seeing a repeat with leaks suggesting that we need to see three more rate hikes.  Understandably, inflationary pressures persist, the labour market remains tight, and the cost-of-living crisis is not easing; media outlets speculate that the RBA may embark on a series of interest rate hikes to address these challenges.

One of the primary drivers behind the expectation of rate hikes is inflationary pressures. Stubborn inflation, fuelled by various factors such as supply chain disruptions, rising energy prices, and robust consumer demand, has surpassed the RBA's target range of 2-3%. Consequently, the central bank may increase interest rates as a pre-emptive measure to curb inflationary pressures and maintain price stability. Moreover, the tightening labor market contributes to the likelihood of interest rate hikes. With unemployment hovering near historical lows and job vacancies surging, wages are mounting pressure, potentially fuelling inflationary pressures further. 

To prevent overheating in the labour market, address wage inflation and realign the cost of living, the RBA, as suggested, may resort to tightening monetary policy to enjoy a recession that may help to balance our current issues. The RBA feels that the economy can withstand a further 0.75% of tightening.

This week, all eyes will be on the Fed's interest rate decision on Wednesday, followed closely by the labor market report on Friday. Investors will also be scrutinising ISM Manufacturing and Services PMIs, alongside JOLTs job openings data, foreign trade figures, factory orders, and the CB consumer confidence index. Earnings season will reach its zenith with reports from heavyweight Amazon, Eli Lilly, Coca-Cola, McDonald's, Mastercard, Qualcomm, Pfizer, ADP, Apple, ConocoPhillips, Amgen, Booking, and Cigna.

On the position front, we remain … in the S+P (…, …), so the positions are still in the money; however, recent Tech profits are seeing a small rebound.  We are … at … in the ASX and are happy to add to this position at a rally. We are still … USD/JPY at … and looking for another entry point. When the BOJ enters the market traditionally, it is a large move. In the other currencies, we are still …, both the AUD/USD (…) and AUS/CHF (…), which is now in profit.

Trade Focus:

Fundamentals:

ASX: Turn around news on the expectations that the RBA will look at a hawkish stance to recent data, and the fact that we could be in for 3 more rate hikes should test the market’s resolve to trade higher. We remain …

Technical Analysis:

Trading around 7640 for the ASX is a balance area. The market can spend a little time here; however, a break below 7560 will see …

Support              …

Resistance         …

Momentum        …