Fed chair’s rate rise comment brings stock rally to an abrupt end

Five days of gains on Australia’s sharemarket ended on Friday after Jerome Powell indicated the US central bank was likely to raise rates next month.

Friday’s was the largest daily loss for the ASX since February. Picture: NCA NewsWire / Nikki Short

Five days of gains on Australia’s sharemarket came to an abrupt end on Friday with the ASX 200 following Wall Street lower after US Federal Reserve chairman Jerome Powell indicated the central bank was likely to raise interest rates at its meeting next month.

It was the largest daily loss for the ASX since February – dropping 119.5 points, or 1.57 per cent – to close at 7473.3, now below its 20-day moving average.

The latest consternation about a rise in rates came after Mr Powell told a panel discussion with the European Central Bank president, Christine Lagarde, that there was “something in the idea of front-end loading” moves to raise rates in a bid to curb price pressures.

“Markets are processing what we’re seeing. They’re reacting appropriately, generally,” Mr Powell said on Thursday.

In Australia, Deutsche Bank economists say they expect first-quarter inflation to be “strong enough to justify the hawkish policy U-turn delivered by” the Reserve Bank at its April meeting.

But it would be “’soft’ enough to prevent a ‘panic’ rate hike in May,” wrote Deutsche’s Phil Odonaghoe in a note to clients on Friday.

“‘Soft’ might not be quite the right word here,” he added.

“A better description – in light of the fact that the RBA appears to have ratcheted up its expectations for this CPI print since the February (statement on monetary policy) – is that an outcome close to our forecast would be consistent with an absence of acute upside ‘surprises’ in the details.”

The Australian Bureau of Statistics is scheduled to release the next CPI figures on Wednesday.

“The RBA’s February SMP outlined a ~1 per cent quarter-on-quarter pick for headline CPI,” wrote Mr Odonaghoe, adding this was “materially softer than our forecasts”. “Recent communication points from the RBA also make clear those forecasts are also probably a little more stale now than is usually the case,” he said.

“In light of the hawkish tilt delivered in that April post-meeting statement, the direction of travel on those forecasts seems clear.”

Meanwhile, some economists believe the prospect of unemployment at near 50-year lows and inflation pushing towards 5 per cent could force the RBA into ­delivering rate rise in May.

More than one in three Australian households now believe rates will jump by one percentage point over the coming 12 months, with a super-sized rate ­increase in New Zealand earlier this month piling pressure on the RBA to act.

On Tuesday, the minutes of the RBA April 5 board meeting noted that “for some time, the Board had been communicating that it wanted to see evidence that inflation is sustainably within the 2 to 3 per cent target range before increasing interest rates”.

“Inflation had picked up and a further increase was expected, with measures of underlying inflation in the March quarter expected to be above 3 per cent,” it read.

After its board meeting a fortnight ago, the RBA removed the word “patient” from its statement on the monetary policy decision, marking a key change in the central bank’s forward guidance on its 0.1 per cent cash rate.

Commonwealth Bank economists expect the headline inflation rate to rise from December’s 3.5 per cent to 4.3 per cent in the April 27 release from the ABS.

The International Monetary Fund this week said it expected global economic growth to slow this year as the repercussions of the war in Ukraine spread, even as countries grappled with rising inflation and interest rates.

It expects the world to grow by some 3.6 per cent this year. It had previously forecast 6.1 per cent.