See if you can spot where the RBA did something a tad unexpected. They raised.

They are raising the rates because inflation is still too high, see below, where the numbers are large…

…and because labour markets are too tight, see below, where the numbers are too low…

So, the market didn’t like it, the market had thought we were at the pause and pivot stage, today’s hike confirms that this 2P outcome is still ahead of us.

No specific call to action, we’ll see where asset prices (across asset classes, and within, across equities, for example) wind up; if the market takes today’s “shock” and runs too hard with it (e.g. 10s back towards 4%) we’ll likely look to take some positions.

One thing that is very likely, these (below mortgage rates) are going to increase.

Those recent cuts to fixed rates (which had been doing the rounds) were only because rates have/had dropped/drifted back on the expectation of a pause. They will consequently unwind.

In other words, the curved finger below beckons.

We write about “let’s see where pricing winds up” because, as a diversified manager we own bits of everything, so any given event doesn’t matter “overmuch”, what matters is how far it runs. For example, will today be good or bad for the banks?

Well, rising rates are normally good for banks. Equally, the market is worried about defaults, and rising bad debt charges. Do the two cancel out? One dominates more than the other? General risk aversion to equities dominating both (i.e. an “option C”), especially given the size/weight of the banks in the index?

It is, alas, unclear. We are market-weight the banks, and could see either narrative driving the outcome. The bank reporting season kicks off towards the back end of the week, and, we expect some good numbers, crouched around the usual negative language that bank executives are wont-to-take, given the optics of appearing “too profitable”.

In general, our allocations to insurance (rates beneficiaries) and underweights to some of the pointier parts of the market (consumer discretionary) should put us in relatively good stead, regardless.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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