CFS Market Update: June 2023

The Reserve Bank of Australia (RBA) announced its twelfth interest rate hike in June, and then chose to hold interest rates in July. China’s slowdown could see stimulus measures introduced and a surprising bull market on Wall Street. 

What’s happened recently? 

• The pace of interest rate rises is slowing across the world
• Recent data shows China’s economy slowing
• Wall Street investors herald a new bull market
• RBA holds rate at 4.1% for July 

Why did these things happen?

The start of June was marked by a twelfth hike of 25 basis points by the Reserve Bank of Australia (RBA), with the rate landing at an 11-year high of 4.1%. According to its meeting minutes, it was a close call with the Board almost deciding not to hike interest rates, which translated into a pause in July.

The Federal Reserve (the Fed) paused its interest rate hikes in June, for the first time since March 2022. With the rate pause in June and last month’s debt ceiling crisis averted, the focus has returned to the Fed’s “soft landing” goal.

The European Central Bank (ECB) held firm on its inflation battle on 15 June, announcing the interest rate of 3.5%, an increase of 25 basis points. ECB President Christine Lagarde said more hikes are on the cards.

Meanwhile, China’s data for factory activity weakened for a third consecutive month in June. This is in stark contrast to previous market expectations banking on its growth momentum and resilience, which will hit global growth in one way or another. With no clear read on the world’s second largest economy, experts are waiting to see if the government will leverage any stimulus measures to support China’s growth.

By early June, Wall Street dominated the news headlines with investors believing that the S&P 500’s 20% gain from its October 2022 low had marked a new bull market. While there is contention around whether this is a true bull market, investor sentiment revealed that the US economy will avoid a recession, at least this year.

As the days rolled into July, economists remained split on the RBA’s decision to increase or pause rates for the month.

On 4 July, the RBA announced it has left rates on hold at 4.1%, however, Governor Philip Lowe stated that further monetary tightening may be required to bring inflation down to the central bank’s target of under 3.0%. He said global economic data, household spending, and inflation and labour market developments will determine the Board’s calls for August and beyond.

The July decision was the second time that the RBA has kept interest rates on hold since May 2022.

Is there good news?

The central banks, while still calling rate increases, are slowing down their pace.

From a local lens, there’s been a sharp decline in the latest monthly measure of Australia’s headline inflation, dropping from 6.8% year-on-year in April to 5.6% in May.

The sooner inflation gets under control, the sooner Australian borrowers can have an extended rate hike break, as well as future rate cuts once the economy is ready to be restimulated. Market experts believe a peak rate of 4.6% must be reached before the RBA begins to consider cutting rates down, so there is not long to go.

According to the International Monetary Fund’s forecast, Australia’s outlook remains strong, with a growth rate of 1.6% predicted in 2023, compared to an average of 1.3% for some advanced economies. 

What could lie ahead?

Market experts still believe the rates will peak at 4.6% but some now believe 4.85% will be the new target. And as rates did not go up in July, commentators believe there will be hikes in store for August and potentially September.

Borrowers have copped 12 interest hikes in 14 months and with many fixed-rate loans set to expire in 2023, homeowners have been advised to be proactive to avoid the “mortgage cliff” and face significantly higher repayments, or at least soften the fall.

What should I do if I’m concerned about my investments?

If you’re wondering about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary. 

If you don’t have an adviser, you can find an adviser near you using our Find an Adviser service at cfs.findadviser.com.au. Call us with any general queries on 13 13 36, Monday to Friday, 8:30am to 6pm Sydney time (+612 8397 1100 from outside of Australia)