Westpac Market Outlook November 2022
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook November 2022' (PDF 389KB)
At the November RBA meeting, the Board decided to lift rates for a seventh consecutive month, by 25bp to 2.85%. The decision not to move rates by 50bps in November, as we anticipated, was despite news that trimmed mean inflation rose by 1.8% in the September quarter, the largest quarterly increase since 1990 and evidence that inflation pressures were becoming more widespread. The RBA is now forecasting that inflation will not return to the target range until 2025 - following three years outside the band. We now expect the RBA cash rate to peak at 3.85% in May 2023, up from our October view of 3.6% in March 2023, given the intensifying inflation pressures.
Markets remain volatile as investors weigh up the outlook for interest rates, particularly for the US federal funds rate. In November, the US FOMC lifted rates by the expected 75bps to 3.875%, followed by a hawkish press conference by Chair Powell, highlighting that inflation risks are biased to the upside. The message was clear. There are more rate hikes to come (we expect a peak of 4.625%) and they are set to stay high for longer. In our view the easing cycle will be delayed until 2024.
Currently, with the contrast in approach and rhetoric between the RBA and both the US FOMC and RBNZ, the Australian dollar is trading on the back foot against both the US dollar and the NZ dollar. Reflecting that widening short end differential a negative spread has consolidated between the 10 year bond for Australia and the US. We continue to expect the AUD to be under siege in the current environment. With the anticipated Fed pivot from 75bps to 50bps in December, we expect the AUD to end the year at around USD0.65 as the USD comes under pressure. This process is likely to be sustained through 2023, with the AUD ending the year at around USD0.72.
Australia: Our view remains that the Australian economy will slow sharply in 2023, with growth forecast to be only 1%, a well below trend pace and well down from an expected 3.4% for 2022. The slowdown is in the face of high inflation and higher interest rates, as well as a fading of recent tailwinds, namely the reopening effect from delta lockdowns and the boost from a declining household saving ratio, correcting from elevated levels. Currently, the Australian economy is in transition. Overall output growth is set to slow from an anticipated robust 1.1% for the September quarter, cooling to 0.6% in the December quarter, then decelerating further early in 2023. Recent partial indicators confirm our view that consumers and housing will lead the downturn. There are some emerging signs of a consumer spending slowdown, with real retail sales losing considerable momentum as high inflation erodes households spending power.
Commodities: Volatility continues to be the main theme in commodity markets, but through October there was a broad trend for softer prices on the back of growing recession fears. However, it was not the same for all commodities, with a wide range of outcomes from a strong rally in met coal to a solid correction in iron ore. We think near term global recession fears will continue to dominate until we move through 2023, when the focus will shift to a recovery in demand and the tight supply conditions for many commodities.
Global FX markets: We expect that the US dollar peak is behind us. Recent US activity data certainly argues in favour of this being the case, as does a recent recovery in Euro and Sterling confidence. Risks remain, but we believe these will subside through 2023, given greater certainty and longevity to the US dollar downtrend. Asia remains the region where we see the greatest opportunity for growth and currency appreciation, against the USD in particular.
New Zealand: We now expect the Official Cash Rate to reach a peak of 5.00% this cycle, by April 2023 (up from our previous forecast of 4.50%). This includes an expected jumbo-size 75bp hike to 4.25% at the November meeting. Inflation is continuing to run red-hot despite the sharp rise in interest rates over the past year. We are also seeing ongoing firmness in domestic economic conditions, including a drum tight labour market, resilience in household demand, and a sizeable boost from the return of international tourists.
United States: The focus following the FOMC’s November decision was the message conveyed by Chair Powell. Ahead, there will be greater recognition of the cumulative effect of policy and the lag with which it operates. However, also apparent is a belief that inflation risks remain skewed, and hence policy makers have more work to do. Real yields will prove a critical gauge over the coming year.
China: As expected, the 2022 National Party Congress delivered for President Xi. While the market has shown concern over the implications for the economy, the reality is that President Xi’s time in power and his legacy will be dictated by the pace and sustainability of economic development. Precise and active management will prove key, and the prospects for persistent strength are good. Note though, success will beget another issue: China’s growing power in Asia and the world will lead to enduring tension with the West.
Europe: In response an intensifying and broadening inflationary pulse, the ECB delivered a second consecutive 75bp rate hike at their October meeting. Despite numerous headwinds, Europe continues to exhibit a high degree of adaptability and resilience, as evinced by a focussed approach to gas storage and robust growth outcomes. A further 75bp of tightening is still necessary in order to quell inflation.
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