RBA Raises Rates, Signals More to Come; Market's Rally Is an Inflation Concern for Some; Americans Are Using Up Their Pandemic Savings

RBA Raises Rates, Signals More to Come; Market's Rally Is an Inflation Concern for Some; Americans Are Using Up Their Pandemic Savings By James Christie

Good day. The Reserve Bank of Australia on Tuesday delivered a ninth consecutive increase in interest rates, raising its benchmark rate by a quarter percentage point, and signaled more to come, suggesting global central banks are headed down different paths as their battle with inflation enters a new phase. "The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary," RBA Gov. Philip Lowe said. Meanwhile, Wall Street is optimistic inflation can keep falling without a major economic downturn in the U.S. But the market rally is stirring up some concern that it is adding fuel to the economy and making it harder for the Federal Reserve to bring down inflation. Comments last week by Fed Chairman Jerome Powell surprised some observers who thought he might do more to push back against the market. "It's important that the markets do reflect the tightening we're putting in place," Mr. Powell said. However, he added that financial conditions had "tightened very significantly over the past year" and that officials weren't focused on "short-term moves." Many Americans might find it hard to share Wall Street's optimism, however, as the cushion of savings they built during the pandemic is thinning, and for some households it is already depleted.

Now on to today's news and analysis.

Top News Reserve Bank of Australia Raises Rates, Signals More to Come

The Reserve Bank of Australia raised its benchmark interest rate to 3.35% from 3.10% and marked the first time that the RBA had tightened policy at nine straight meetings of its board . Explaining the move, RBA Gov. Philip Lowe said inflation was at its highest level in more than three decades.

The RBA's concerns about inflation and the potential for an acceleration in wage growth are preventing it from taking time out to assess how the economy is adjusting to the unprecedented policy tightening of recent months.

Market Rally Stirs Concerns It Could Feed Inflation

Wall Street's latest obsession is how much its recent optimism matters to the economy. Fueled by hopes that inflation can keep falling without a major economic downturn, the S&P 500 has climbed around 7% so far this year, even after declines following Friday's strong jobs report. Bond prices have also surged. The rally, though, has stirred anxieties . At a press conference last week, Fed Chair Jerome Powell was repeatedly asked if market developments made the job of fighting inflation harder by making it easier to borrow and encouraging spending. The questions echoed a common concern heard on Wall Street.

The Market's Breadth Is Improving as More Stocks Join Rally

More stocks across different sectors are participating in the market's 2023 rebound, often a sign of a rally's durability . The S&P 500 has risen 7.1%, with last year's worst performers bouncing back sharply to lead the way.

Glynn's Take: RBA Could Take Official Rate Above 4.0% to Tame Inflation By James Glynn

There should no longer be any lingering doubt about the hawkish intentions of the Reserve Bank of Australia this year after it announced a ninth consecutive rise in the official cash rate on Tuesday, and signaled that it has a lot more work to do.

To be sure, the tone of RBA Gov. Philip Lowe's comments on the increase in the official cash rate by 25 basis points to 3.35% suggests the Australian central bank could well be on track to soon take the benchmark rate to a peak beyond 4.0% before it is done. Read more .

U.S. Economy Households Burn Through What's Left of Their Pandemic Savings

Americans have spent down about 35% of extra savings they accumulated during the pandemic as of mid-January, according to Goldman Sachs. By the end of the year, it forecasts they will have exhausted roughly 65% of that money .

Perfect Storm for Some: Fewer Interest Deductions, Rising Rates

Some U.S. companies face reduced cash flows and higher tax bills this year as they are hit by a double whammy : Federal Reserve interest-rate increases and a tax-law change on deducting interest expenses.

Home-Buying Companies Stuck With Hundreds of Houses

A handful of young companies known as power buyers created a niche business around helping home buyers gain an edge during the housing boom. Now that the market has cooled, some of these firms are stuck with hundreds of homes .

Key Developments Around the World Farmland Becomes Flashpoint in U.S.-China Relations

For more than two years, the mayor of Grand Forks, N.D., backed a Chinese company's plans to build a $700 million corn mill on the outskirts of town, then last week he reversed course .

Russian Deficit Soars to $25 Billion on War Spending, Oil Embargo

Western oil sanctions and soaring battlefield costs took a heavy toll on Russia's finances last month, pushing the government budget into its deepest deficit to start the year in more than a decade.

Chevron Explores Algerian Gas Plans Amid Russian Sanctions

Oil giant Chevron Corp. is looking to seal an energy exploration deal with Algeria, as the North African country steps up efforts to replace sanctioned Russian supplies in nearby Europe, according to people familiar with the matter.

Thailand Pins Hopes on Return of Long-Missed Chinese Tourists

The absence of Chinese visitors devastated Thailand, where officials say tourism accounted for a fifth of gross domestic product in 2019. They say it could take about two years for arrivals to get back to their prepandemic peak.

Financial Regulation Roundup Top GOP Tax Legislator Says He'll Boost Workers, Probe Companies

Rep. Jason Smith, the House's new top tax writer as Ways and Means Committee chairman, is promoting an approach he says would favor working-class Americans over large corporations, a shift from his predecessors .

Biden to Urge Quadrupling New Tax on Stock Buybacks

President Biden plans to propose quadrupling the 1% tax on stock buybacks that took effect in January, which the White House said would encourage companies to invest in their growth instead of boosting shareholders.

Robinhood Hits Back at Securities and Exchange Commission

Robinhood Markets Inc., facing a dire threat from a plan by the SEC to overhaul the handling of small investors' trades, which would turn back the clock to the days before zero-commission trading, is mounting a counterattack .

U.K. Regulators Are Urged to Address Pension Risks After 2022 Crisis

U.K. regulators failed to properly monitor the risks created by the derivatives-based investment strategy that upended the U.K.'s pension sector last year, an investment approach that poses a continuing risk to companies.

Forward Guidance Tuesday (all times ET)

8:30 a.m.: Canada trade report for December; U.S. trade report for December

10:30 a.m.: Bank of England's Cunliffe speech on central bank digital currency at UK Finance

12 p.m.: ECB's Schnabel in webinar on monetary policy in times of pandemic and war hosted by Finanzwende e.V.

12:40 p.m.: Fed's Powell speaks at Economic Club of Washington, D.C.

12:45 p.m.: Bank of Canada's Macklem speech to CFA Society Quebec

3 p.m.: U.S. consumer credit report for December

Wednesday

9:20 a.m.: New York Fed's Williams speaks at WSJ CFO Network Summit

10 a.m.: U.S. wholesale trade report for December

1:30 p.m.: Bank of Canada publishes deliberations of policy decision by Governing Council

Research Odds Rise for Fed Interest Rate Increases Through May

Bank of America Global Research analysts write in a note that January's U.S. jobs report gives them more confidence in their outlook for two additional 25 basis point interest rate increases by the Federal Reserve and a terminal rate of 5.0% to 5.25%. "Following the February FOMC meeting, where Chair Powell sent a strong signal about a willingness to embrace opportunistic disinflation, we felt risks to our call had shifted in the direction of an earlier end to policy rate tightening, perhaps at the March meeting," the analysts write. "The January employment situation report, in our view, shifts the balance of risks in the opposite direction." They add that they "think the tone of the report-most notably the acceleration of employment growth and hours worked in January and their implication for growth in labor market income-increases the likelihood the Fed hikes through May."

-James Christie

Larger Deficits, Debt Seen for U.S. Government

Fitch Ratings says in a report it expects the U.S. government to see larger deficits and a rising debt-to-gross domestic product ratio in the next two years, adding that "spending challenges in relation to healthcare and social security will rise steadily in the next decade." According to Fitch, "fiscal tailwinds that helped U.S. sovereign debt-to-GDP to fall in 2022 following the Covid-19 shock are fading." The rating agency also says "slower economic growth and falling inflation will curtail recent strong revenue increases, while rising interest costs and cost-of-living measures are feeding into higher spending." Preliminary first-quarter data show the federal deficit widened by nearly 12% from a year earlier to $421 billion, Fitch says. "This reflected both revenue declines and spending measures, including higher social security outlays and debt interest costs," according to Fitch.

-Stephen Nakrosis

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02-07-23 0722ET