Hot Issues
spacer
How could the latest Budget impact your tax return?
spacer
8 indicators you may not be ready to retire
spacer
State and Federal COVID-19 support---July 2022
spacer
What is an offset account and how does it work?
spacer
How to invest responsibly and ethically.
spacer
Largest inflation rates by country in oceania
spacer
National property prices fall for the first time since the pandemic
spacer
Australia’s new Government
spacer
Is my employer paying me the right super?
spacer
7 age pension traps to avoid
spacer
What is gazumping and how to prevent it happening to you
spacer
Total GDP Nominal by Country ( 1960-2050)
spacer
Can you use your pension to retire debt free?
spacer
Super changes that could affect you from 1 July 2022
spacer
Your super checklist for EOFY
spacer
9 money conversations to have with your partner
spacer
Australian housing slowdown Q&A
spacer
Largest cities in the world 1500 to 2100
spacer
Federal budget 2022: Winners and Losers
spacer
Why Australian interest rates are likely to rise and when
spacer
Living costs for retirees rise at fastest pace in 10 years
spacer
9 money tips if you’re having a baby
spacer
The US Federal Reserve starts raising interest rates
spacer
Federal Budget 2022 – Overview
spacer
Federal Budget 2022 and YOU - Part 1
spacer
Federal Budget 2022 and YOU - Part 2
spacer
The escalation in Ukraine tensions - implications for investors
spacer
Why it’s important to think about insurance ahead of retirement
spacer
Budget smarter with the 50/20/30 rule
spacer
What happens to my super when I die?
spacer
DGP by country since 1800
spacer
Tax-deductible super contributions explained
spacer
Share market falls - seven things for investors to keep in mind
spacer
Vaccination rates (Dose)
spacer
Understanding insurance in your super
spacer
How can refinancing your home loan save you money?
spacer
2022 - a list of lists regarding the macro investment outlook
spacer
Review of 2021, outlook for 2022
spacer
Bull vs Bear
spacer
How to save for retirement at every age
spacer
Five ways you can start to bridge the super gender gap today
spacer
5 money mistakes to avoid if you’re going guarantor
spacer
Our 2021 Advent Calendar.
spacer
How does a transition to retirement pension work?
spacer
Asian Economies (1960 - 2020)
spacer
The longer-term legacy of coronavirus
spacer
What you should know about creating your will and estate plan
spacer
What info is on my credit report and why does it matter?
spacer
The worry list for shares - how worrying are they?
spacer
Types of retirement pensions explained
spacer
7 ways to stay active and healthy in retirement
spacer
There’s an investor in all of us - and most of us already invest in one way or another
spacer
World's most productive countries
spacer
Why is Australian housing so expensive and what can be done to improve housing affordability?
spacer
COVID relief continues for retirees
spacer
Greenhouse gas emission by country since 1880
spacer
How does the First Home Super Saver Scheme (FHSSS) work?
spacer
Spouse super contributions - what are the benefits?
spacer
China’s growth slowdown and regulatory crackdown
spacer
Lockdowns and mental health
spacer
Salary sacrificing into super - how it works
spacer
Super bring-forward rules now apply to more people
spacer
The work test and work test exemption explained
spacer
Coronavirus continues to cause havoc globally and in Australia
spacer
Five ways to turn down the noise and stay focused as an investor
spacer
Considerations for different retirement living options
spacer
Videos and other resources for our clients
spacer
Keeping your super on track during a career break
spacer
Your guide to the super guarantee (SG) and rate changes
spacer
The never-ending coronavirus pandemic
spacer
Can I go back to work if I’ve already accessed my super?
spacer
2020-21 saw investment returns rebound
spacer
Tax Time Checklists - Super Funds; Individuals; and Company, Trust, Partnership
spacer
What is capital gains tax and when might I have to pay it?
spacer
6 steps to help you feel more positive about your finances
spacer
End of year (EOY) financial strategies
spacer
The 2021-22 Australian Budget - Analysis
spacer
Videos to help understand financial planning topics.
spacer
Investing on behalf of your kids
spacer
Super contribution caps are going up from 1 July 2021
spacer
Protecting your loved ones
spacer
Federal Budget 2021 - Overview
spacer
Building a more secure and resilient Australia
spacer
Federal Budget 2021 - Health
spacer
The return of geopolitical risk? - what to watch over the remainder of 2021
spacer
Relationship break-up entitlements when you're in a de facto
spacer
What do you need to think about when deciding when to retire?
spacer
6 steps to building good financial habits
spacer
RBA on hold and likely to remain easy for a long while yet as full employment gets more of a look in
spacer
More Aussies look to buy property and refinance
spacer
A new crypto world is emerging - the non-fungible token
spacer
Saving for your child's future
spacer
5 tips for creating your own good fortune this Lunar New Year
spacer
A broad range of Calculators.
spacer
Shares have had a very strong rebound since March last year so where are we in the investment cycle?
spacer
ATO Small Business Newsroom
spacer
Many in the dark about retirement
spacer
Transfer balance cap set to increase to $1.7 million
spacer
How to rebuild your super after a COVID-19 withdrawal
spacer
Financial wellness in 2020 - how did yours compare?
spacer
The global economy and investment markets this year
spacer
ASIC sounds warning around high-yield bond scams
spacer
Is $1m enough to retire?
spacer
How much super should I have at my age?
spacer
Tips for parents who became the bank of mum and dad
spacer
How to 2020-proof your finances
spacer
Vaccination rates as they happen around the world
spacer
2021 - a list of lists regarding the macro investment outlook
spacer
2020 - the year that united us
spacer
Videos and other resources for our clients
spacer
How to review your direct debits and save
spacer
Majority of working Aussies to benefit from personal income tax cuts
spacer
2020 is coming to an end. Phew!!
spacer
Review of 2020, outlook for 2021
spacer
The right times for financial advice
spacer
Is your home loan still right for you?
spacer
3 golden rules that make saving for retirement easier
spacer
How to budget for your social life in retirement
spacer
Still The Lucky Country
spacer
Comprehensive list of COVID-19 initiatives and packages.
spacer
Understanding the Age Pension income and assets test
spacer
Considerations when downsizing your home
spacer
Ways to help reduce your debts before you retire
spacer
How to identify (and beat) your spending triggers
spacer
Budget 2020 - A very comprehensive break down.
spacer
Budget 2020 - At a Glance, Overview, Outlook
spacer
Budget 2020 - Fact Sheets
spacer
JobKeeper extension – changes implemented
spacer
Australia's "eye popping" budget deficit and public debt blow out
spacer
The economics of COVID-19 lockdowns
spacer
How mindfulness can improve the way we work
spacer
Taking control of your personal finances in a COVID-19 world
spacer
September update of latest COVID-19 initiatives.
spacer
Seven reasons why the trend in shares will likely remain up, albeit with bumps along the way
spacer
Market outlook Q&A
spacer
Changes to super contribution rules for over 65s
spacer
COVID-19: How long may your super savings take to recover?
spacer
Boost your super in the lead up to retirement
spacer
4 ways to help prepare your finances for a recession
spacer
JobKeeper - Latest Update
spacer
Australian economic and fiscal update
spacer
The fiscal cliff is more likely to be a fiscal slope
spacer
Protect yourself from COVID-19 related scams
spacer
The economic hangover of COVID-19: how long will it last?
spacer
How to rebuild your super after a COVID-19 withdrawal
spacer
Market update - July 2020
spacer
Investment options and retirement
spacer
Extra Tools & Resources for our clients.
spacer
The Australian economy and recovery from COVID-19
spacer
Digital payments and online banking for older Aussies
spacer
The coming surge in Australia's budget deficit and public debt due to coronavirus
spacer
10 medium to longer-term implications from the coronavirus shock
spacer
Thinking about insurance ahead of retirement
spacer
Gifting and financial generosity during coronavirus
spacer
Diversification - why it matters now more than ever
spacer
The value of financial advice
spacer
Our Website, your resources
spacer
Light at the end of the coronavirus tunnel
spacer
Market update
spacer
Changes to pension drawdown and deeming rates
spacer
Preserving retirement saving during COVID-19
spacer
How investment market volatility could affect your super
spacer
COVID-19: Early Childhood Education and Care Relief Package
spacer
The coronavirus pandemic and the economy – a Q&A from an investment perspective
spacer
Money challenges women face
spacer
Data so large it's hard to comprehend.
spacer
Is coronavirus driving a recession, depression or an economic hit like no other?
spacer
Holding your nerve – why retirees fear a market plunge
spacer
Historic $130bn wage subsidy to cover 6 million workers
spacer
Stage 2 – Covid-19 stimulus package.
spacer
Covid-19 Update - Small Business
spacer
PM launches $17.6 billion virus stimulus plan
spacer
The plunge in shares – seven things investors need to keep in mind
spacer
Three reasons why low inflation is good for shares and property
spacer
Can refinancing my home loan save me money?
spacer
Expected GDP by country 2010 to 2100
spacer
Super investment options – what’s right for you?
spacer
Life beyond work
spacer
Statistical picture of Australia - Update
spacer
A resource hub for our clients.
spacer
Market Update
spacer
Real Time World Population Growth - Wow!!
spacer
Dividends explained
spacer
Start 2020 with a best snapshot of Australia.
spacer
5 tips for green investing
spacer
Make Australians save again
spacer
Bushfires and the Australian economy
spacer
Grow your super in the new year
spacer
Australia by the Numbers
spacer
How to create realistic goals…… and stick to them.
spacer
5 days to get your finances in order
spacer
Our Advent calendar for 2019
spacer
5 reasons why I’m not so fussed about the global outlook
spacer
Superannuation changes
spacer
You'll be the life of the party when armed with this information!
spacer
7 tips to improve your financial wellness
spacer
Rebooting for retirement
spacer
5 reasons why the A$ may be close to the bottom
spacer
Resist today, relax tomorrow
spacer
Market Update 30 September 2019
spacer
How much superannuation is enough?
spacer
All Australia's vital statistics - October 2019
spacer
6 new financial videos
spacer
Boost savings with compound interest
spacer
High times for low interest rates
spacer
Market Update - September 2019
spacer
Will the world slip up on oil again?
spacer
Australia by the numbers - September 2019
spacer
Spending money in a cashless world
spacer
Dealing with being cash poor and asset rich
spacer
Saving for a rainy day
spacer
Market update
spacer
Access to more resources and tools than most websites.
spacer
Nine reasons why recession remains unlikely in Australia
spacer
Can I go back to work if I’ve accessed my super?
spacer
How's Australia doing statistically?
spacer
Protecting your super package.
spacer
Making the most of record-low interest rates.
spacer
Market Update 2019
spacer
How the top 10 global companies have changes since 1998
spacer
The longest US economic expansion ever
spacer
When can I access my super
spacer
Australia by numbers – Update
spacer
How to retire early
spacer
How to play catch up with your Super
spacer
Inflation undershoots in Australia
spacer
9 money mistakes to avoid in retirement
spacer
What a financial planner does to help.
spacer
Australia's vital statistics.
spacer
What kind of money parent are you?
spacer
How to save money
spacer
Federal Budget 2019 - Overview
spacer
How the 2019 Federal Budget affects you
spacer
New Global growth slowing, plunging bond yields & inverted yield curves
spacer
Women and Money
spacer
Market Update - March 2019
spacer
The problem with getting to 53 years of age.
spacer
How to avoid a travel debt hangover
spacer
Things to avoid as a newbie investor
spacer
Budget Time - How's Australia going?
spacer
Most older Aussies prefer home care over a nursing home
spacer
Why growth in China is unlikely to slow too far
spacer
10 money conversations to have when your relationship heats up
spacer
Australia slides into a 'per capita recession'
spacer
6 steps to get your money stuff together
spacer
All you need to know about how Australia is going.
spacer
Australian housing downturn Q&A
spacer
6 ways to reduce your credit card debt once and for all
spacer
5 life insurance questions you've always wanted to ask
spacer
2019 a list of lists - regarding the macro investment outlook
spacer
Part 4 - The major benefit of ‘behavioural coaching'
spacer
How to adult—a quick guide to personal finances in your 20s
spacer
How Australia is performing.
spacer
The Australian economy in 2019
spacer
Holiday budgeting tips— How to avoid a travel debt hangover
spacer
Australia - a comprehensive run-down of our vital statistics.
spacer
The Fed and market turmoil - the Fed turns a bit dovish but not enough (yet)
spacer
12 ways to avoid waste this Christmas
spacer
Rising US interest rates, trade wars, the US midterm election results, etc
spacer
Our Advent calendar for 2018
spacer
Responsible and ethical investing
spacer
What are the 3 biggest living expenses for households?
spacer
Your Adviser and Behavioural Coaching
spacer
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
spacer
Information needed to be the BBQ expert.
spacer
Would you like to retire by 40?
spacer
The property cycle and the economy
spacer
How financial advice helps create wealth.
spacer
7 money personalities you may identify with or want to avoid
spacer
Are shares expensive?
spacer
How's Australia doing statistically?
spacer
Super investment options – what’s right for you?
spacer
Here's how to lead a happier life
spacer
What happened to all the worries about rising inflation and bond yields? Goldilocks, tariffs, Turkey & other things
spacer
Is it better to buy an investment property or home first?
spacer
Nine keys to successful investing
spacer
This information will turn you into a fireside expert.
spacer
How Australians will use their tax return
spacer
Lessons from the blue zones: secrets of a long life
spacer
Trumponomics and investment markets
spacer
Tools for budgeting, cash flow, Super and more ….
spacer
How much super should I have at my age?
spacer
How tax deductible personal super contributions work
spacer
The rise of the gig economy and side gigs (thanks to technology)
spacer
Statistics for all Australians
spacer
Watch out for tax scams
spacer
After the Australian household debt and east coast housing booms
spacer
Now’s the time for tax planning
spacer
Why it pays to contribute to your partner's super
spacer
Australia by numbers – Update
spacer
How to deal with financial stress – nearly 1 in 3 affected
spacer
Federal Budget 2018 – Overview
spacer
Your Budget
spacer
4 components of our 2018 Federal Budget
spacer
US China trade war fears – Q & A
spacer
Tools to help you manage your financial position are available on our site.
spacer
7 ways to boost your super
spacer
Australians reveal their priority goals
spacer
Australia by numbers – Update
spacer
Your retirement questions answered
spacer
How to make money by turning your unwanted goods into cash
spacer
Our website is really our digital office.
spacer
Bitcoin – is it really for you?
spacer
Spread your money, reduce risk
spacer
Love and money? It’s not about control
spacer
The pullback in shares - seven reasons not to be too concerned
spacer
Australia. All you need to know to be the expert.
spacer
Australian’s love affair with debt - how big is the risk?
spacer
5 ways to keep a cool head in a falling share market
spacer
2018 – a list of lists regarding the macro investment outlook
spacer
Sports lovers enjoy better financial fitness
spacer
Where Australia is at. Our leading indicators.
spacer
The year that was and the year ahead
spacer
Add some extra cash to your New Year
spacer
New year, new financial resolutions
spacer
Our Advent calendar for 2017
spacer
Where are we in the global investment cycle?
spacer
Australia's vital statistics
spacer
12 ways to enjoy summer without spending a fortune
spacer
One in three Aussies travel without protection
spacer
Digital payment options could see you spend more this Christmas
spacer
If you’ve always thought property prices only go up…
spacer
Will Australian house prices crash?
spacer
Where are we in the global investment cycle and what's the risk of a 1987 style crash?
spacer
Money steps for women
spacer
Resources on our site to help you, your family and your friends.
spacer
Australian Dietary Guidelines and healthy eating chart (PDF)
spacer
How to retire, your way
spacer
Prepare for retirement without missing out today
spacer
Be the boss of your cash
spacer
The Australian economy bounces back again
spacer
Should you lend money to family?
spacer
Money mistakes people make in their 50s and 60s
spacer
Australian Dietary Guidelines and healthy eating chart (PDF)
spacer
Eight steps to improved cashflow... and lifestyle
spacer
Powerful Budgeting, cash flow and Super Tools available on our site.
spacer
5 ways Australians will use their tax return this year
spacer
Australia's leading causes of death - ABS
spacer
The threat of war with North Korea
spacer
Six traits of Australians living the dream
spacer
The break higher in the Australian dollar is likely to be limited
spacer
Money can buy you happiness, you’re just spending it wrong
spacer
Key Economic Indicators, 2017 – updated
spacer
Helping your kids buy a home
spacer
From Goldilocks to taper tantrum 2.0
spacer
What’s your debt age?
spacer
Doing a budget is a good idea but ....
spacer
Planning is the key to making it financially
spacer
What to do when you come into money
spacer
Managing your money when you move in together
spacer
Reduce your bills with these household items
spacer
It pays to contribute to your partner's super
spacer
How to cope with losing independence
spacer
Transition to retirement income streams
spacer
The Australian economy hits another rough patch
spacer
Watch out for tax scams
spacer
The three core pillars of this year's budget
spacer
Federal Budget - 2017-18 - Overview
spacer
Federal Budget - 2017-18 - Budget documents
spacer
Make the most of the current super caps
spacer
Five, four, three… it’s not too late to get more in super
spacer
Super changes are coming
spacer
What’s your debt age?
spacer
Australian cash rate on hold
spacer
Super changes this financial year - Dr Shane Oliver - video
spacer
The door is closing on super’s current caps
spacer
Is Donald Trump's honeymoon with investors over?
spacer
Estate planning and why you need a super plan
spacer
What does a comfortable retirement look like?
spacer
Give your career a health check
spacer
Super changes from July 2017
spacer
Changes to the Age Pension assets test
spacer
Keep your money safe over the silly season
spacer
Looking ahead at 2017
spacer
Review of 2016, outlook for 2017 - looking better despite the political noise
spacer
Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
spacer
54.2 million worries
spacer
Five tips for happy healthy ageing
spacer
Thinking about managing your own super?
spacer
Sending more to the tax office than you should?
spacer
Government pulls back on proposed changes to super
spacer
Market Update - What to consider when investing in a low return world
spacer
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
spacer
Oliver's Insight - Megatrends
spacer
Value of Advice
spacer
A growing family doesn't have to blow the budget
spacer
Blinded by optimism
spacer
Thinking about managing your own super?
spacer
The investment outlook - it's not all that bad!
spacer
What’s your biggest obstacle to financial success?
spacer
Ageing Parents
spacer
Should you own the roof over your head?
spacer
Be a senior entrepreneur on your own terms!
spacer
Brexit and other key developments
spacer
Brexit wins
spacer
Commentary on major issues - AMP
spacer
Five money habits for a happy financial year
spacer
Remember to factor in parental subsidies at tax time
spacer
Are grandparents giving too much?
spacer
2016-17 Federal Budget - AMP
spacer
2016 Budget in detail
spacer
How (and why) to talk to your adult children about insurance
spacer
Procrastination: Just do it. Eventually.
spacer
Why Australian property won't collapse
spacer
The Lucky Country holding up pretty well
spacer
Have we reached the bottom?
spacer
The evolution of the Chinese consumer
spacer
Retirement rolls around faster than you think
spacer
Pressed for time?
spacer
Changes to the Age Pension assets test
spacer
Women are building financial intelligence
spacer
Heirlooms no more
spacer
Initial market falls precede stronger returns - Shane Oliver
spacer
What exactly is income protection insurance and do I need it?
spacer
A rough start to the year, which could have further to go
spacer
Aged Care - Changes to Assessment of Rental Income
spacer
A bump in the road, then a new start
spacer
New year, new start – are you ready for retirement?
spacer
Review of 2015, outlook for 2016 - Dr Shane Oliver
spacer
We wish you a Merry Christmas for 2015 and a Happy New Year
spacer
Go easy on the plastic over Christmas
spacer
Resolutions for a wealthy future
spacer
The Australian dollar doing what it normally does - overshoot. Dr Shane Oliver
spacer
How to manage volatility in a low return world
spacer
The Australian economy - more help will be needed. Dr Shane Oliver
spacer
Insurance through my super
spacer
Four tactics to build an investment portfolio
spacer
The demand for global infrastructure
spacer
Help achieve your investment goals with dynamic asset allocation
spacer
The Power of Budgeting
spacer
Jump retirement hurdles with a coach
spacer
Preparing for the time of your life
spacer
A Super Loan for all reasons
spacer
Making a smooth transition
spacer
Budget 2015 - some professional opinions
spacer
Australian Government - Budget 2015
spacer
Achieving a comfortable retirement
spacer
Is off-the-plan on the money?
spacer
Should I take my super as a lump sum or not?
spacer
Do you have a key person in your business?
spacer
Tips for success in a competitive job market
spacer
All you need to know about buying at auction
spacer
To sell or not to sell?
spacer
Saving in a material world
The US Federal Reserve starts raising interest rates

Dr Shane Oliver - Head of Investment Strategy and Chief Economist, AMP Capital

Key points

- The Fed has finally joined other central banks in raising interest rates, taking the Fed Funds rate from a range of 0-0.25% to 0.25-0.5%. This was well flagged and reflects the tight US labour market and high inflation.

- The Fed flagged another six rate hikes this year and the start of quantitative tightening soon.

- First rate hikes in a tightening cycle don’t normally signal the end of a bull market in shares but they are consistent with a more constrained & rougher ride. High inflation & the war in Ukraine also add to the risks.

- Reflecting similar but less intense inflation pressures, the RBA is expected to start raising rates in June.

Introduction

After much anticipation, the US Federal Reserve has raised its Federal Funds target interest rate from a range of 0-0.25%, where it’s been for the last two years since the pandemic started, to the range of 0.25-0.5%.

 

Global interest rates

Source: Bloomberg, AMP

Central banks in various countries including Korea, Norway, NZ, the UK and Canada started raising rates in the last six months as economies recovered, labour markets tightened, and inflation surged in response to supply constraints. The Fed has been flagging the start of rate hikes for this year for six months and started warning of a move in March early this year after inflation kept surprising on the upside. So the move was fully factored into financial markets with US shares actually rallying on positive Fed comments on US economic growth.

The so called median “dot plot” of Fed officials interest rate expectations has now moved up to seven 0.25% hikes this year from three in December and while the Fed sees uncertainty flowing from the war in Ukraine its now more focused on controlling inflation, seeing the US economy as strong.

 

Fed "dot plot" versus market expectations

Source: Fed, Bloomberg, AMP

The Fed also signalled that it will likely start Quantitative Tightening (ie, running down its bond holdings – to be achieved by not replacing bonds as they mature) as soon as May.
 

Why the hike?

The reasons for the hike are simple and are the same as seen in other countries. Economic activity has recovered, the labour market is very tight with unemployment at 3.8% consistent with the Fed’s aim of maximum employment, inflation is at a 40-year high and core inflation is at 6.4%yoy and it’s still rising.
 

The investment cycle

From a broad cyclical perspective, the Fed joining other central banks in starting to raise interest rates should not be a major concern for investors. But its yet more confirmation that we have moved into a more constrained and volatile phase of the cycle for shares. A typical cyclical bull market has three phases:

 

  • Phase 1 normally starts when economic conditions are still weak and confidence is poor, but smart investors start to see value in shares and anticipate economic and profit recovery helped by easy monetary conditions. In the current bull market this started way back in March/April 2020.
  • Phase 2 is driven by rising profits as growth turns up and scepticism turns into optimism. While monetary policy tightens, it is from very easy conditions & remains easy, so bond yields rise, but not enough to derail the bull market.
  • Phase 3 sees investors move from optimism to euphoria, which pushes shares into clearly overvalued territory. Meanwhile, strong economic conditions drive significant inflation problems and force central banks to move into tight monetary policy. The combination of clear overvaluation, investors being fully invested and tight monetary policy sets the scene for a new bear market.

What does it mean for investment markets?

Of course, we don’t always make it to investor euphoria, but (abstracting from the uncertainty flowing from the war in Ukraine), we are likely in Phase 2 of the investment cycle. Monetary support is diminishing & we are now more dependent on earnings growth. This shifting of the gears from the Phase 1 valuation driven gains typically sees some slowing in share market gains and more volatility. Against this background:

 

  • The Fed and other central banks are reflecting the reality of economic recovery.
  • US monetary policy and that in most other major central banks remains very easy.
  • The experience of the last 30 years suggests that while first rate hikes in a tightening cycle can cause a dip and volatility in shares, the bull market usually resumes until rates become onerously tight, which weighs on economic activity and profits. This can be seen in the next chart. US shares had wobbles when interest rates first started to move up in February 1994 (US shares had a 9% correction), in June 2004 (US shares had an 8% correction) and in December 2015 (US shares had a 13% correction) but thereafter they resumed their rising trend and a bear market did not set in till 2000, 2007 and 2020 after multiple hikes. Of course, the 2020 bear market was ostensibly due to the pandemic. Recession did not come for seven years after the February 1994 first hike, for three and a half years after the June 2004 first hike and for four years after the December 2015 first hike. This is because the first rate hike only takes monetary policy to less easy, and it’s only when monetary policy becomes tight that the economy gets hit.

US shares and interest rates

Source: Bloomberg, AMP

  • One guide to whether monetary policy is tight or not is the shape of the yield curve (long-term bond yields less short-term rates) – with a period of long-term bond rates falling below short-term rates often preceding recession in the US. At present different versions of the yield curve (10-year yields less the Fed Funds rate and 10-year yields less the 2-year bond rate) are diverging with a sharp flattening in the latter, but the former has been seen as more reliable and it’s still very steep and a long way from presaging recession.

US yield curve inversions and recessions

Source: Bloomberg, AMP

  • Despite widespread views to the contrary the relationship between US interest and the US dollar looked at on a trade weighted basis is rather messy. The $US actually fell through the Fed rate hike cycles of 1994-95 and 2004-06 as rate hikes were seen as a sign of economic recovery which reduced haven demand for the $US. And the $US trended sideways through the 2015-18 interest rate hiking cycle. It rose after the resumption of the tightening cycle in 1999 but this reflected the tech boom when the US was all the rage.

The $US and US interest rates

Source: Bloomberg, AMP

In summary, while the Fed’s move to raise rates is consistent with volatile and constrained share market returns ahead, it’s not necessarily consistent with an end to the bull market (or at least the start of a deep bear market) as monetary policy is far from tight and unlikely to be enough to drive a US recession. This is more of a risk for 2024 than for 2023 or 2022.
 

Risks

While past experience suggests little reason to be too concerned by the first US rate hike, there are two main risks:
 

  • inflation pressures are far more significant than at any time since the early 1980s and this may necessitate an even faster tightening in monetary policy than in the past.
  • the war in Ukraine is a major source of uncertainty both in terms of adding to and extending the supply side constraints that are boosting inflation and posing a threat of weaker global growth – notably in Europe.

Provided the conflict in Ukraine does not expand to include Russia directly at war with NATO forces, Russian gas and energy to Europe is not cut off and recovery in production from the pandemic can continue (albeit with periodic setbacks as in China at present) then some pressure may come off inflation (and hence central banks including the Fed) later this year.
 

Impact on Australian interest rates & the $A

The RBA will soon follow the Fed in starting to raise interest rates. We expect the first hike to come in June taking the cash rate to 0.25%, with three hikes in total this year taking it to 0.75% by year end. This is not because the Fed is raising rates. As the first chart shows the link between US and Australian rates has been tenuous in recent times with the RBA hiking in 2009-10 when the Fed did nothing and the RBA cutting or on hold when the Fed raised rates over 2015 to 2018. They only move together if there is cyclical alignment and this year there is, with both the US and Australia recovering from the pandemic and seeing rising inflation. However, Australian interest rates are likely to rise less than US interest rates reflecting lower inflation in Australia and the start of a downturn in Australian property prices which will dampen the pressure to raise rates much. This means the gap between Australian and US interest rates will likely go negative.

While a decline in the short-term interest rate gap between Australia and the US normally puts downwards pressure on the value of the $A this is likely to be more than offset by strong commodity prices which is being accentuated by the war in Ukraine. As a result, unless there is a global recession, we continue to see the $A rising over the next year.
 

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.