Market lurches on back of 'marginally dovish’ RBA rhetoric

While Reserve Bank (RBA) governor Philip Lowe doesn’t want the market to count its chickens too soon, investors appear to have taken some comfort from his “marginally dovish” outlook today, with the ASX200 moving from 6,795 early afternoon to 6,836 points at the close.

What seems to have excited the market was the alacrity with which interest rates may start to cool from here on in.

While the energy sector was dragged down by lower oil prices, IT, materials, discretionary, health care, utilities, real estate and industrials sectors all ended the day higher.

Unsurprisingly, interest rate sensitive tech and real estate stocks were standouts today with both sectors up 3.3% and 2.9% respectively.

Bet each way

Within his address today to the Anika Foundation in Sydney, Lowe noted that after delivering 2.25 percentage points in hikes in five months, the “case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”

That’s not to say further (or higher) increases in interest rates won’t be required over the months ahead to vanquish the “scourge” of high inflation.

Mea culpa

It’s cold comfort now, but Lowe also conceded that the RBA’s faulty previous (interest rate) guidance assumed there’d be a lid on inflation throughout 2022.

What the market actually witnessed was an annual rate of 6.1% in June – a three decade high.

Lowe noted that the cost of building a new home rose 20%, adding close to 2 percentage points to headline inflation alone.

Has growth peaked?

Lowe’s comments today follow yesterday’s national accounts figures which revealed the economy grew through the three months to June, ending the quarter 3.6% larger than a year before, courtesy of household spending on services, plus the booming commodities export market.

Due to higher rates, a cooling commodity boom, intensifying cost of living pressures, and falling real wages, there’s a prevailing view that last quarter may signal a peak for growth.

3.1% by year’s end

The market is pricing in another three 0.25 percentage-point rate hikes in each of the three remaining monthly board meetings this year, taking the cash rate to 3.1%.

While NAB economists expect the RBA to downshift to increments of 0.25 percentage points in October and November, taking the cash rate to 2.85%, the bank then expects the RBA to put further rate hikes on hiatus while taking stock.

Meantime, ANZ expects the RBA to lift the cash rate by 50 basis points in October to 2.85%, but flags "considerable risk" that the RBA could slow its hiking to 25bp in the month.