RBA hike rates by a supersized 50bp and pile pressure on ASX200

At its monthly meeting this afternoon, the Reserve Bank Board surprised the market and raised its official cash rate by a supersized 50 bp from 0.35% to 0.85%.

In the lead up to today's meeting, market pundits were split between a 25bp hike and a 40bp hike. The interest rate market was caught in the middle at 35bp.

The trigger for the 50bp hike is a more determined attack by the RBA on above target and still accelerating inflation.

In Q1 2022, headline inflation hit 5.1% and core inflation hit 3.7% - 70bp above the RBA's 2-3% target. In the May statement, the RBA revised its inflation forecasts to around 6% by year-end and for core inflation to rise to 4.75%.

Today, the RBA noted upside risks to its inflation forecasts coming from floods in NSW and QLD and rising electricity and gas prices. It also stated that it's not just global factors playing a role and that "domestic factors are playing a role too now."

The statement noted the ongoing tightness in the labour market. The unemployment rate at 3.9% sits at 50-year lows and is expected to fall further. A factor that is expected to lift wage growth and inflation.

"The Bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market."

Today's move by the RBA echoes recent moves by the Federal Reserve, the RBNZ and the Bank of Canada, who have all front-loaded with 50bp rate hikes, rapidly becoming the new normal.

While the RBA's forward guidance wasn't as clear as its central bank peers, the door is open for the RBA to lift by another 50bp rate hike next month as the RBA takes the cash rate back towards the neutral rate of 2.50%.

"The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market."

What does it mean for the ASX200?

In the lead up to today's RBA meeting, the ASX200 was straining under the weight of higher yields and lower U.S equity futures after U.S 10-year yields stormed higher to close above 3% for the first time in nearly a month.

The expectation of a more aggressive RBA hiking cycle is viewed as a negative to the ASX200 in the short term.

After rejecting the resistance coming from the 200-day moving average last week up near 7300, today's break of support at 7100 is viewed as an indication the ASX200 is on its way towards the bottom of its nine-month range 6950/6750 area.

Source Tradingview. The figures stated are as of June 7th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.