The market thumping has only just started

If Fed Reserve chair Jerome Powell carries through with the interest rate hikes that are required, US and Australian shares are headed for a 10 per cent fall, maybe more.

A trader works on the floor of the New York Stock Exchange. Picture: Michael Nagle/Bloomberg

Well, Fed head Jerome Powell is certainly talking tough like the legendary Paul – ‘we will crush inflation’ – Volcker. And so far he has his board 100 per cent behind him.

If he carries through with the interest rate hikes that are required and to which he seems committed, US – and Australian – share prices are headed at least 10 per cent lower, and maybe considerably more.

As I’ve explained, what our Reserve Bank does with its official rate is all-but irrelevant to our share market.

For property, yes, it is absolutely critical, but for the share market it has only at most an indirect impact.

Further, the RBA does not have to follow the Fed step-by-step on the way up, in quite the same way as it was dragged down - most reluctantly under former RBA Governor Glenn Stevens through the mid-2010s, and then subsequently under current governor Philip Lowe.

Indeed, that should be obvious from what has already happened this year. The Fed’s delivered three 75-pointers in a row, the RBA has stuck with 50-pointers.

Last week Lowe said explicitly that the next meeting, in two weeks, would consider either a 25-point hike or a 50-point hike.

US Federal Reserve Board Chairman Jerome Powell. Picture: Drew Angerer/Getty Images/AFP

There is zero prospect of the Fed hike making him consider a 75-pointer. Indeed, it doesn’t even lock in a 50-pointer. Both will still be on the table, through the RBA management ‘recommendation’ ahead of the meeting. The key RBA meeting is the one on Melbourne Cup Day. That will come after the September quarter inflation data.

Our inflation has so far been relatively – and I stress that word, relatively – muted compared with the US, where the inflation tiger got out of the cage and was off rampaging mid-way through last year.

We can ‘thank’ the (very different) Victorian and NSW premiers for the delayed eruption of inflation. Their extended lockdowns late last year kept a – temporary - lid on building inflation. It also gave a – completely wrong – sense of ‘inflation, what inflation?’ to Governor Lowe; leading him to be late out of the blocks with that first rate rise in May.

Officially inflation, according to the ABS, was ‘only’ 6.1 per cent over the June year.

Properly analysed though – given the dampening impact of those late-2021 lockdowns – it was really running at closer to 8 per cent. That’s the June half annualised.

The RBA forecasts that to be the peak, and then falling through 2023 and 2024.

While the September quarter CPI will be absolutely critical to the Cup Day meeting – especially if it ‘shocks’ Lowe and his team; the wages data mid-November will be key for the December meeting, the last of the year.

That’s why I would not be surprised to see Lowe deliver only a 25-pointer in October – he has to increase by something – to see where the inflation is pointing, ahead of the Cup Day meeting.

But whether 25 or 50 in two weeks, it will all end at pretty much the same point – higher - when we get into 2023.

I’m not so certain about the Fed.

Yes, the talking is tough, and so far also the delivery, with three 75-pointers in a row.

But the rate is still ludicrously low – 3 per cent as against US inflation of 8 per cent; while the associated un-printing of the $US5 trillion ($7.5 trillion) that was printed from the GFC through Covid is proceeding very slowly. But still, tightening, like the ‘boiling frog’ analogy.

I’m still not convinced, though, that when Wall St throws a real tantrum – the post rate hike drop of 520 in the Dow wasn’t even a foot thump – that Powell won’t buckle.

Then there’s all the ‘other stuff’ like Putin, Ukraine, energy, China and supply chains. Can I say: it all bears ‘watching’?

Originally published as The market thumping has only just started