Morning Wrap: ASX to open lower, RBA likely to hike rates (again), Jonathan Pain's "perfect portfolio"

ASX 200 Futures are down 11 points to 6,993, as of 8:15am AEDT.

For those who enjoy a punt, it's Melbourne Cup day. For everyone else, a Cup Day interest rate hike from the Reserve Bank appears to be all but a formality. Last week, the ASX flirted with correction territory but despite a temporary bounce, one investor says 6,400 is a more likely 12-month price target than 7,600 for the local bourse. And if you're reading this over breakfast, we have some charts to tickle your taste buds.

Let's dive in.

S&P 500 SESSION CHART

A late day rally gets the S&P 500 over the line - just. (Source: TradingView)

HEADLINES

• Wall St ends slightly higher after rally as Fed speakers, Treasury auctions eyed (Reuters)

• Warren Buffett’s Berkshire Hathaway Sits on Record $157 Billion Cash Pile (WSJ)

• Citigroup transformation to now include at least 10% of employees cut in several major businesses (CNBC)

• Morgan Stanley’s Wilson Warns Stock Gains Are Bear Market Rally (Bloomberg)

• RBA rate hike expected but not certain (The Australian)

• A ‘new starting point’ as China relations stabilise (AFR)

• Yellen to Meet With China Counterpart This Week Before Biden-Xi Talks (Bloomberg)

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Its RBA Day

The latest RBA interest rate decision will be handed down at 2:30pm this afternoon. Rates markets and the economics community have all but accepted a 25 basis point rate hike, with an upside surprise on Q3 inflation being the core culprit. We wrote about some of the other reasons why in this piece.

Rates pricing, but way more colourful. (Source: eToro)

But what if this isn't the last rate hike for the cycle? Oxford Economics has been toying with that question. They had already flagged that a mid-year pause from the RBA was "optimistic".

Now, the question is whether the RBA thinks one hike will be enough to get the job done or whether two will be needed to bring inflation back down to the cherished 2-3% target range. Here is their response:

"If the RBA has lost patience and wants to guarantee a faster return of inflation to target, it is unlikely they will see one 25 basis point move as being enough to get the job done. We now expect to see rate hikes at both the November and December meetings," Oxford Economics' Sean Langcake wrote recently.

Two more hikes stand clearly at odds with most of the economics community who think that it's one more and done. UBS' George Tharenou is one of those who thinks we won't see a December rate hike in addition to the one coming this afternoon. But there is a catch.

"We think a back-to-back rate hike in Nov and Dec is not that likely, especially given that Q3 GDP is released the day after the December meeting. Indeed, we expect the RBA will want to wait for the Q4 2023 CPI data (due on January 31), to assess whether the trend of inflation is 'persistent' enough to make another change to their inflation outlook, especially since the Feb-23 Statement on Monetary Policy will extend their forecast horizon by six months to Q2-2026," Tharenou wrote to clients yesterday.

In short, just because a rate hike may not come at Christmas doesn't mean you can rule out one coming in the new year.

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ASX Performance on RBA Day

• 7 Feb -0.46% (in-line)

• 7 March: +0.49% (in-line)

• 8 April: +0.18% (in-line)

• 2 May: -0.92% (unexpected hike)

• 6 June: -1.2% (unexpected hike)

• 4 July: +0.45% (unexpected pause)

• 1 August: +0.54% (unexpected pause)

• 5 September: -0.06% (in-line)

• 3 October: -1.28% (in-line)

Note: The resources sector sold off heavily on 3 October

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The Rate Cut Debate

While rate cuts are far from a certainty for 2024 in Australia, they are already happening in other parts of the world. One indicator from the Bank of America, which looks at developed market and emerging market central banks, suggests rate cuts are happening at the fastest pace since before the COVID-19 pandemic.

Source: Bank of America

In his weekly note, veteran investor Jonathan Pain argued the case for why central banks will not only cut interest rates next year but at a faster pace than many are pricing in.

Maybe it’s those infamous long and variable lags that are now beginning to bite. Maybe it’s the commercial real estate crisis in Europe and America. Maybe it’s that banks are becoming ultra-conservative in their lending as they hurriedly seek to shrink their balance sheets. Maybe indebted consumers, pretty much everywhere, have woken up to the reality that a surge in interest costs does have consequences.

But in his classic uber-bearish fashion, Pain did not let up on his recession call - arguing a US-led recession continues to be postponed and not cancelled. He said last week's bounce was a sign of significant overselling in both bonds and equities.

And while he continues to believe that the US stock market is too expensive, he did make one change to his 'perfect portfolio':

• "Why don’t you own a piece of farmland?

• A piece of Nvidia.

• A piece of gold.

• A large chunk of U.S Treasury bills and quite a few U.S Treasury bonds too.

• Oh yes, and a bit of Microsoft."

His words, not ours. Do your own research folks.

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Hans' Chart of the Day

Before we go, a chart which befits the time this Wrap goes out. Sugar prices closed last week at their highest levels in more than a decade. Coffee prices are up more 17% this month (yes, that's right. This month.) But what breakfast item is coming down in price? Orange juice! Last week's decline in the orange futures contract was the largest in six years. And for this author, that's really good news.

(No, I'm not short oranges, I just really like orange juice.)

Source: Barchart

ASX corporate actions occurring today:

• Trading ex-div: CSR (CSR) – $0.15 

• Dividends paid: Veris (VRS) – $0.001, New Hope (NHC) – $0.21 

• Listing: None 

Economic calendar (AEDT):

• 2:00 pm: China Balance of Trade

• 2:30 pm: RBA Interest Rate Decision