Optimism ahead for global markets

There are reasons for optimism in global markets on a 12-month view, despite short-term risks, according to Shane Oliver.

These included peaks in producer price inflation in the US, UK, China and Japan, falling freight rates, lower commodity prices and falling inflation expectations in the US and Australia, helped by aggressive rate increases.

Inflation was 8.2% in the US and 6.1% in Australia while interest rates were 2.35% in Australia and 2.25%-2.35% in the US.

Oliver, chief economist at AMP Capital, said: “The bottom line is that while short-term inflation remains high, these considerations are consistent with the US having reached peak inflation and point to lower inflation ahead which should enable central banks to slowdown the pace of hiking by year end in time to avoid a severe recession.

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“If this applies in the US, then Australia should follow as its lagging the US by about six months with respect to inflation. For this reason, while short term risks around shares remain high, we remain optimistic on shares on a 12-month horizon.”

Oliver said he expected the Reserve Bank of Australia (RBA) would raise rates again at its next meeting but consider scaling back rises to 0.25% and peak at 2.85%.

“The RBA sets interest rates for Australia, not the US; it would only need to match the US if its worried about a crash in the $A boosting Australian inflation but so far there is no sign of that (and the Fed hiked from 2015 to 2018 while the RBA cut without the $A crashing); and wages growth in Australia is running well below where it is in the US giving the RBA a bit more flexibility to allow for monetary policy lags.”