US activity slows
In the US, interest rate hikes have pretty much frozen up activity in the housing market, but have been less effective at cooling the economy overall...at least so far.
This week it was reported that the keenly-watched ISM gauge fell from a reading of 55.1 to just 51.2 in March (which was far worse that the market median expected figure of 54.4).
Ex-pandemic, this is getting close to the lowest reading we have seen since the global financial crisis.
Notably the services price index component fell to the lowest level since June 2020, the business activity gauge slowed, and inventories rose to a 2-year high.
In summary, much weaker that expected, with softness apparent across the board.
Employment figures have remained resolutely strong to date in the US, but markets increasingly seem to be of the view that with inflation have peaked way back in June 2022, the interest rate hikes are almost done.
2-year Treasury yields are trading at around 3.8 per cent, so lower interest rates ahead may well soon be order of the day.
Down Under
What about in Australia?
RBA Governor Lowe this week explained why the interest rate hikes here have been more effective and with greater speed (largely due to us having mostly variable rate mortgages, and, furthermore, we don't have a high level of wages growth to contend with either).
This week new orders nosedived by 28.1 points to -19.8 on AIG's Australian industry index (see my Twitter feed for details), an alarming drop which likely mirrors the sharp drop in spending which is anticipated for March.
If you were to interrogate financial markets, they'd say that interest rate hikes here in Australia are basically over and done with for this cycle:
Sydney homebuyers have apparently decided it is so, pushing housing prices back up over the past quarter - although it's not necessarily been the same property types which fared well through the pandemic restrictions.
This rebound for Sydney housing reflects extremely tight rental markets, low stock levels, and rapidly increased immigration.
Looking ahead
Next week we'll get employment figures for March, with markets expecting only a modest uptick in the unemployment rate at this stage to 3.6 per cent, although immigration is gathering a real head of steam now.
The deciding figures will be the inflation data for the first quarter of 2023, which are due to be released on 26 April.
If they're still running hot then it's possible that we do still see another 'virtue signaling' interest rate hike to a cash rate target of 3.85 per cent, but you only have to look at the leading indicators such as new home sales or the activity gauges to know that we're more or less done with the hiking cycle now.
Although we got our fair share of the global spike in inflation over the past year - mainly caused by lockdowns and border closures - we are likely in time to see travel, airfare, and tourism prices falling, lower prices for building materials and housing construction costs, and then cheaper, food, fuel prices, and energy costs.
Certainly markets have just about seen enough to conclude as such, with construction insolvencies now rising to the highest level in a decade.
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Australia's 3-year bond yield closed out the week at 2.79 per cent, so we'll see plenty of lenders continuing to cut their fixed rate mortgage offerings at the present time.
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Have a super Easter weekend...especially if you're up in Noosa, as most of the east coast of Australia seems to be!
