Puzzle Financial Advice

Rising interest rates 2021

7/4/2021 In countries like USA and Australia, interest rates are now rising

In his 3/April/2021 update, Jon Pain says: "Take a look at the December 2023 euro dollar futures contract, which tells us where the market thinks 3-month $ rates will be in December 2023. To calculate the implied 3-month $ rate you do the following calculation...100 minus 98.725, which equals 1.275%, and implies quite a few increases in the federal funds rate."

BB comment: In other words, the chart below is showing that by the end of 2023, "the market" is of the view that US cash rates will rise by about 1.25% - and clearly as each day passes, the market is pricing in higher and higher US cash rates by end of 2023.  And if the US rates cash rates by 1.25% by the end of 2023, then one would also expect that Australian RBA cash rates will also do something similar.

What about the future of cash rates?

• Canada

  • 22/Apr/21 "How the Bank of Canada could influence the RBA’s next move"

    • https://www.afr.com/policy/economy/how-the-bank-of-canada-could-influence-the-rba-s-next-move-20210422-p57li0 

    • 'The Bank of Canada’s decision to bring forward the time when it expects to raise interest rates could influence the Reserve Bank of Australia at its board meeting next month about how it guides the market on keeping record low rates until 2024.  The Canadian central bank’s decision to cut back its bond purchases – quantitative easing (QE) – could also influence the RBA’s attitude to that part of monetary policy.

    • Higher house prices usually come with increased consumer spending and more employment, which can create pressure on wage growth. That can bring inflation back into the range the central bank targets. For the Bank of Canada “this is now expected to happen some time in the second half of 2022” instead of 2023.'

• USA.

  • 3/May/21 "Fed policy risk is the biggest challenge for investors"  El-Erian.

    • https://www.afr.com/policy/economy/fed-framework-holds-central-bank-hostage-20210504-p57onr 

    • 'For quite a while now, the Fed has worried about a balance of risk tilted towards deflation. That balance of risk has flipped.

    • 'The US Federal Reserve ... has set aside accumulating evidence about the strong economic recovery, dismissed financial stability concerns and reiterated that the rise in inflation would be transitory.      By contrast, many economists are either unsure, or outright worried about inflation being persistent. Indications of market froth are multiplying in an “everything rally”. More companies are warning about rising input costs, with some signalling that this will be passed on to prices. The contrast between the Fed stance and all this is why policy risk has climbed up the ranks to be one of the major challenges that investors will be navigating this year.'

  • 4/May/21 Janet Yellen, secretary of the Treasury, ex-chairperson of the US Fed. "Janet Yellen says interest rates might need to rise to keep economy from overheating."

    • https://www.nytimes.com/2021/05/04/business/economy/janet-yellen-interest-rates.html 

    • "Treasury Secretary Janet L. Yellen said higher interest rates might be needed to keep the economy from overheating given the large investments that the Biden administration is proposing to rebuild the nation’s infrastructure and remake its labor force."

    • https://www.ft.com/content/049f4a79-abff-4a6c-a7c1-13409e8f63ae 

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Four-year fixed interest rates below 2pc are gone (afr.com)   1/June/21

• The phenomenon of ultra-cheap four-year fixed rate home loan offers has ended after less than a year with the last lender in the market lifting rates in line with rivals.  BankVic is the final lender to capitulate after raising its four-year fixed rate offer for owner-occupiers paying principal and interest to 2.29 per cent from 1.95 per cent.

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Four rate hikes expected by mid-2024 (afr.com)   7/June/21

• "Bank bill futures imply a cash rate of 1.1 per cent by June 2024, which would equate to at least four rate hikes in 25 basis point increments except for the first, from the current 0.1 per cent."

RBA’s Christopher Kent says fixed rate borrowing has boomed, but they are starting to rise (afr.com)     8/June/21

• Market expectations are the RBA will also not extend its yield curve control from the April 2024 three-year bond to the November 2024 bond when the board meets to discuss it in July. “That means it will have passed on an opportunity to reverse the gradual tightening in fixed rates that has occurred since late 2020,” Westpac said.

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