Can the Hawks Navigate the Inflation Storm?

US Yields on the Rise!
Federal Reserve Chair Jerome Powell made a clear statement at the recent Jackson Hole meeting, “History shows that the employment costs of bringing down inflation are likely to increase with delay,” he said. “Our aim is to avoid that outcome by acting with resolve now.” 

Channeling his inner Paul Volcker, Powell was referring to the high levels of inflation of the 1970s through the early 1980s. In 1979, then US Fed Chair Volcker raised rates beyond a comfortable level – to 20%!! – which caused a deep recession. Powell’s aggressiveness in raising interest rates has sent US bond yields soaring to their highest levels since the early 1980s. The 10-year yield sits around 3.25, just 25 basis points from the 2022 high of 3.50. 

When economic growth is accelerating, the higher interest rates can absorb the higher borrowing costs. The problem today is that growth is slowing and is expected to continue to slow. Investors sell riskier assets like stocks, causing stock prices to fall, and money is put into safer assets like US Treasury bonds, leading to yields falling. However, yields are being pressured higher by the Fed raising rates, while stocks are also falling. 

When the Fed raises rates while growth is slowing, it has adverse effects on the economy, creating a lot of volatility in the financial markets. The last time the Fed raised rates during a growth slowdown was towards the end of 2018, which caused the S&P 500 to fall roughly 18% in just a couple of months. 

Currently, stocks are reacting the same way they did in 2018 to the Fed raising rates. The S&P 500 was down as much as 23% in June, bounced higher but is still down roughly 17% on the year. With the Fed expected to continue raising interest rates, investors should expect more volatility and increased levels of risk.

In the Land Down Under
On 6 September, the RBA announced a 50-basis point hike in interest rates, making the cash rate raise to 2.35%. The Australian Bureau of Statistics released the Q2 GDP, up 0.9% from the previous quarter and 3.6% year-on-year. The strong GDP also reflects the slowdown of the economy, including the decline of household deposits portion, prices of commodities and housing-related investments. 

The RBA sees Australian inflation could peak by the end of this year. Now it is not just a matter of how much the rate will rise, but also how long the high-rate environment will last.

The Tiger Brokers’ platform, Tiger Trade, enables you to diversify your portfolio across stocks, options, and ETFs, with access to ASX, US and HK stocks, and over ten thousand listed products. Plus, avoid sleepless nights and wasted time constantly checking where global prices are trading by placing stop-loss (and take-profit!) orders. This also facilitates following your pre-determined investment plan and not being caught up in middle of the night clear-thinking paralysis while markets are swinging wildly and you could be sleeping soundly.