The Australian markets had a rough and tumble day on Tuesday off the back of inflation levels exceeding expectations.
The annual inflation rate up to the December 2021 quarter was 3.5%, and quarterly inflation was 1.3%. Households are no doubt feeling the bite.
This figure is an official number.
You should know it’s likely understating the actual prices an average household is paying on a day-to-day basis. It’s true for me!
Markets sold down heavily on Tuesday. The ASX All Ordinaries fell almost 200 points or 2.8%.
Strangely, gold stocks tumbled even harder, with the ASX Gold Index falling 5.6%.
You would think this is counterintuitive, as gold is meant to act as an inflation hedge.
That said, mining companies are facing rising costs from labour shortages and rising oil prices. The price of crude oil is now more than US$85 a barrel or 60% higher than the price at the start of 2021.
There was no relief yesterday either. The All Ords tumbled another 1.8%. A steep sell-off during mid-day trading brought it down by as much as 3.2%.
Why is this happening?
The Federal Reserve came out with a hawkish statement. It recognised that inflation was well above their mandated target of 2%. It also referred to the jobs market as strong, signalling that it would continue to tighten its policy going forward.
The talk of a strong jobs market seemed very much out of place. The news keeps reporting about how the government is pressuring employers to terminate workers who refuse to take their vaccinations.
Then there are all those people who are unable to work because of arbitrary lockdowns in Democrat-controlled states keeping businesses closed.
Many households are on the brink of bankruptcy as they struggle to make ends meet on rising inflation and uncertain job prospects.
The Federal Reserve is very much in a world of its own.
What is clear is the Federal Reserve is rushing to try and bring the markets to their definition of ‘normal’, whatever that means.
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Monetary policy bungle, markets misread the Fed’s stance
Everything rallied strongly in the hours prior to the 2:00pm press release.
It seemed like the market was hoping for a softer stance from the Federal Reserve given the sharp market decline since the start of the year.
Nice try, but no cigar.
The markets responded with a ‘what the hell’ reversal on their initial positions.
As above, gold did not escape the sell-down. It took a US$30 hit to trade back at around US$1,820 an ounce or AU$2,550 an ounce. And it seems to be heading back to US$1,800 an ounce once more.
Australian markets brace for impact
I don’t think gold will stay down for long. The broader markets, not so sure.
I know that many market commentators are saying that the bounce is overdue and the correction is over.
The Federal Reserve announcement and the market reaction following it appear to suggest this could be a little wishful.
There could be more rough and tumble ahead for the markets. After all, the real economy is in an anaemic position.
The eastern seaboard is currently under pressure from record daily cases of the Wuhan virus and its variants.
The general public has resumed their hesitation about returning to normal life in the midst of this. It may dissipate as many get infected and recover, realising that this is more like a deferred flu season. However, it will take time for people to condition to this.
The media narrative of fear and the draconian government restrictions have reduced a significant proportion of the public to cooping up at home. It will take a while to convince them to rejoin the community and work to revive the economy.
Return of capital a prudent strategy leading up to the federal election
The federal election is coming up.
Watch the federal government battle it out with state premiers to try and drag the economy up to rally their voter base. The premiers from the Australian Labor Party may be keen to keep things closed up even if it means to spite the Coalition Party.
A nation divided against itself cannot stand. The economy is now a political plaything.
It pays to be cautious than greedy in the backdrop of a more hawkish Fed and political shenanigans at home.
Take stock of your big winners from last year and consider whether you want to take a safer route in the upcoming turmoil. This year could be about return OF capital, rather than return ON capital.
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.