This time last week, the Reserve Bank Board delivered a dovish 25bp hike taking the cash to 3.60%. Speaking at a conference the following day, RBA Governor Philip Lowe opened the door to a pause.
Responding to the RBA’s dovish overtures, the ASX 200 springboarded to a high of 7370.3, a level which now seems like a distant memory after its rapid-fire 5% dive over the past five trading sessions.
At this morning’s 6950.6 low, the ASX 200 erased all of January’s gains and, excluding dividends, is down over 1% for the year.
What has caused the sell-off?
The cause of the sell-off can be traced to the collapse of three regional US banks in recent days, an unintended consequence of the Fed’s aggressive tightening cycle that provides yet another example that the Fed will tighten until something breaks.
Leaping to the Fed’s defence, it took prompt and decisive action over the weekend to guarantee deposits above $250,000. Furthermore, the introduction of the Bank Term Fund Facility (which provides cheap funding to banks) has starkly contrasted with its sloth-like response during the banking crisis in 2008.
No doubt this is evidence that the Fed was unwilling to risk confidence in the banking sector to cascade further.
Why is a US banking collapse being felt so acutely on the ASX 200?
Until the dust settles in the US, investors will continue to questions all banks around:
- Rate hedging strategies
- Possible capital raises
- Net Interest Margin (NIM) compression
- Wider credit spreads
- Tighter lending standards.
What does it mean for the RBA’s rate hiking cycle?
A potential banking crisis threat trumps high inflation any day of the week. Reflecting the repricing of the Fed’s priorities, two-year yields in the U.S. are trading at 4% from 5.08% last week. After being 70% priced for a 50bp rate hike last week, there is now just 12bps priced for the upcoming FOMC meeting.
In Australia, the interest rate market is almost fully priced for a 25bp RBA rate cut by July.
Does Thursday’s Australian jobs data even matter?
In January, Employment declined by 12k, its second fall in succession, missing market forecasts for a 20k rise. The unemployment rate rose from 3.5% to 3.7%, despite the participation rate dropping to 66.5%.
On Thursday, the market is looking for a gain in employment of 45k and for the unemployment rate to remain at 3.7%.
A softer-than-expected number would reinforce the case for an RBA pause and possibly a rate cut. In contrast, a hotter-than-expected jobs number will likely be looked through.
What about the technicals?
After its rampaging run higher in January, we had been expecting a pullback in the ASX 200 to the 7200/7000 support area to reset longs. Providing the ASX 200 can stage a prompt rebound back above the 200-day moving average at 7010 (like it did in early January), we will stay with the view that the pullback from the Feb 7567 high is countertrend and that a rebound will follow.
However, should the ASX 200 sustain its break below 7010/00 and then break the January 6905 low, it would signal a deeper decline to 6750 is set to unfold.