Higher peak
The Reserve Bank 25 basis points interest rate hike went against market expectations yesterday.
Obviously as someone with a mortgage I was hoping for a further pause, but being objective it was an understandable decision - it was rather a case of kill inflation now, or risk it sticking around for longer.
Market expectations at the market close on Monday were for interest rates to peak imminently, before easing through 2024.
By the close of business yesterday, the near-term peak for interest rates was ratcheted higher, but with markets instead pricing sharper cuts next year.
Overnight there were more market jitters for US banks, with the share prices of Western Alliance Bancorporation and PacWest Bancorp crashing anew.
Oil prices plunged 5 per cent on recession fears, and risk appetite receded to the extent that Australia's 3-year bond yield fell all the way back to where it was last week at 3.1 per cent.
Per capita recession
Australia's retail numbers are due to be released this morning, and while retail turnover in nominal terms is higher than the pre-COVID trend (due to rising prices), in volume terms retail is contracting sharply to the extent that Australia is likely now in a per capita GDP recession.
The big question going forward is what on earth is going to happen in the construction sector, with struggling developers unable to deliver enough housing in the capital cities to match the demand from record high immigration.
National vacancies for rental units under 1 per cent for the first time on record (and in the capital cities rental vacancies are at all-time lows).
Rents are therefore surging in the capital cities, driven by inner city apartments, with Sydney unit rents accelerating in rising another +6 per cent in the March quarter.
There is still a large volume of dwellings under construction, but much of this is detached housing across regional Australia, where rents are now easing, as opposed to medium-density capital city housing.
Builders are going bust all over the place, with land sales down 70 per cent (who's going to risk buying new dwellings at the moment?), while the surviving builders are losing money.
With interest rates rising again and a record lending assessment buffer in place, it's almost impossible to see the development of new capital city units picking up until sales prices rise significantly.
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Robert Gottliebsen tackled this issue in The Australian today here (paywalled):
