Markets prepare for cash rate question, as warnings of ‘stretched valuations’ fly
The ASX is poised for a lift at open after continued climbs in American shares.
All eyes are on the Reserve Bank, amid expectations it will slash the cash rate this week, as reporting season threatens to reveal the state of the nation’s companies as they publish their latest earnings updates.
Several ASX-listed companies are set to report their earnings in the week ahead, including consumer retail major JB Hi-Fi, utilities players AGL Energy and Origin Energy, as well as Commonwealth Bank.
Futures markets were pointing to a weak market open on Monday, up 13.5 points to 8769 or a 0.15 per cent climb.
This comes after American markets, led by tech stocks, posed a lofty Friday close.
The S&P 500 closed up 0.8 per cent on Friday, narrowly missing a record after hitting 6,389.45.
The tech-heavy NASDAQ Composite Index also gained 1 per cent on Friday to close at 21,450.02.
This was followed by the Dow Jones Industrial Average, which climbed 0.5 per cent to 44,175.61.
The board of the RBA is set to meet on Tuesday, after surprising the market in July when it failed to move, despite market expectations, leaving the cash rate on hold at 3.85 per cent.
Analysts are expecting the RBA to move, with many dialling in expectations of a 25 basis points cut to 3.6 per cent.
Judo Bank economist Warren Hogan said the RBA was getting closer to neutral rate settings at 3.5 per cent, noting he thought a 35 basis points cut was needed at the coming meeting.
“The reality is although the latest inflation figures are OK, the economy is in this grinding recovery,” he said.
“The one issue is making sure inflation stays between 2 and 3.”
Mr Hogan, who is also managing director at EQ Economics, said the fall off in inflation was being driven by a slump in business margins, which would drive a cautious posture at the RBA about future decisions.
He warned business could quickly pass through costs to consumers, which could drive a spurt in inflation.
“If we start getting evidence at the coal face from business, saying we’re able to start passing on costs, that’s not good for inflation,“ he said.
“This could well easily be the last rate cut.”
AMP deputy chief economist Diana Mousina said 100 basis points in cuts were expected in the current easing cycle, taking the cash rate to 2.85 per cent.
The easing cycle could see a crunch in bank earnings, while other sectors recover.
CBA, the country’s largest lender, is preparing to reveal its full year earnings update on Wednesday after a 35.3 per cent run up in its share price, last trading at $176.61 on Friday.
The ASX closed last week higher, despite a Friday upset from poor company earnings, up 1.67 per cent to 8807.1.
Insurer QBE was dealt an 8.78 per cent drubbing on Friday, falling $2.06 to $21.39.
Rival insurers Suncorp and Insurance Australia Group are set to report this week.
Ms Mousina said listed company valuations were increasingly looking stretched, warning the coming months were likely to be “messy for sharemarkets”.
“But on a 6-12 month outlook, we think sharemarkets will be higher as Trump pivots towards more market friendly policies, the economic data stabilises and the Fed cuts rates again,” she said.
Ms Mousina said Australian house prices were also poised for an “upswing on the back of lower interest rates”, dialling expectations of a 6 per cent price rise this year.
Additional reporting: AFP
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