Batten down the hatches as RBA may hit households with 'supersized' interest rate hike on Melbourne Cup day

RBA set to inflict yet more pain as ANZ and others warn tougher times are ahead.

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1) In early afternoon trade, the S&P/ASX 200 Index (ASX: XJO) is again in positive territory, up 0.6% to 6,848, its highest level in six long weeks.

Mining and energy stocks lead the way, as they have for so much of this year, with the BHP Group Ltd (ASX: BHP) share price up 2.1% to $39.35 and the Woodside Energy Ltd (ASX: WDS) share price up 2.5% to $35.78.

Whilst it has been a year to forget for tech stock investors, resources stocks have literally been money machines both from a share price appreciation perspective and their fully franked dividends.

If you believe commodity prices will stay higher for longer, the good times are likely to last, with Woodside shares trading on a forecast fully franked dividend yield of around 10%.

That said, commodity stocks have a long history of bust following the boom – despite its stellar run over the past 12 months, the BHP share price is barely higher than where it traded way back in October 2007. 

2) By contrast, the pain continues for tech stocks, with Facebook owner Meta Platforms (NASDAQ: META) shares plunging 20% in after hours trading after it "gave a forecast for revenue in the fourth quarter that was on the low end of analysts' estimates, showing the social-media platform continues to struggle with a weak advertising market amid an economic slowdown," according to Bloomberg. Excerpt:

"Meta is on shaky legs when it comes to the current state of its business," said Debra Aho Williamson, an analyst at Insider Intelligence. "Zuckerberg's decision to focus his company on the future promise of the metaverse took his attention away from the unfortunate realities of today: Meta is under incredible pressure from weakening worldwide economic conditions, challenges with Apple's App Tracking Transparency policy, and competition from other companies, including TikTok, for users and revenue."

The Meta share price was already down 55% year to date, with more pain to come. 

3) Despite the bear market for tech stocks showing no sign of ending, Bloomberg reports Morgan Stanley's Mike Wilson, a well-known stock market sceptic who correctly predicted this year's slump, as saying he believes the bear market in US equities may conclude sooner than investors think.

"We think ultimately the bear market will be over probably sometime in the first quarter," Wilson said in an interview on Bloomberg Television.

The same Bloomberg article says not all strategists are hopeful that US equities will bottom soon, with Goldman Sachs recently saying conditions for a trough aren't visible yet "as stocks don't fully reflect the latest rise in real yields and odds of a recession."

Earnings risk – as reflected by the big falls in Alphabet, Microsoft, Spotify and now Meta Platforms – is fast becoming the driver of stock market performance. 

4) With the RBA set to inflict yet more pain on mortgage-holders by raising interest rates on Melbourne Cup day, there's no doubt tougher days are ahead for Australian consumers.

Prior to this week's shock 32-year high inflation print, expectations were that the RBA would lift interest rates by 25 basis points, as they did at their October meeting.

Now at least two banks are saying the RBA will go back to supersized rate increases, with Westpac chief economist Bill Evans saying the central bank will raise by 50 basis points to 3.1%, and will keep going to 3.85%.

Investment bank Barrenjoey is also tipping the RBA will raise interest rates by basis points on Tuesday, lifting its terminal rate to 3.6%.

Such terminal rates would add at least one full percentage point to standard variable home loans, potentially putting them around 7.5% in the first quarter of 2023. 

5) Despite reporting a 5% increase in cash profit and a 3% increase in its final dividend to 72 cents, the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is on the nose Thursday, falling 3.3% to $24.99 in afternoon trading.

ANZ shares trade on a modest 11.5 times cash profits and a decent fully franked dividend yield of 5.7%. Still, analysts at Goldman Sachs aren't buying it, the investment bank currently having a neutral rating and $26.09 price target on the ANZ share price.

ANZ CEO Shayne Elliott says that aggregate household balance sheets, net of liquid assets, are the best they have been for 15 years. That said, he acknowledges there are tougher times ahead…

"… cost-of-living pressures are starting to have a meaningful impact and the next six months will be testing. This is particularly an issue for first-time homeowners who are only starting to build up their equity as well as those with less stable employment."

"There is uncertainty ahead, however we have the business in good shape to withstand volatility."

6) As AGM season continues, two recurring themes are emerging…

  1. First quarter sales numbers are cycling a period when most of Australia was in lockdown, making year on year comparisons very difficult. Online sales are a long way off this time last year, whilst in-store sales are obviously way higher.
  2. Retailers are almost universal in cautioning that tougher times are ahead… 


"… an uncertain retail environment and with household budgets under increasing pressure…"  – JB Hi-Fi Limited (ASX: JBH)

"While current trading remains strong, the Group expects higher mortgage rates and

increased cost of living expenses will begin to impact consumer spending." – Super Retail Group Ltd (ASX: SUL)

The JB Hi-Fi share price is largely flat today. At around $43, its shares trade on a cheap looking 9 times earnings and a trailing fully franked dividend yield of over 7%. 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Motley Fool contributor Bruce Jackson has positions in Alphabet (A shares), Alphabet (C shares), and Meta Platforms, Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., Microsoft, Spotify Technology, and Super Retail Group Limited. The Motley Fool Australia has positions in and has recommended Super Retail Group Limited. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), JB Hi-Fi Limited, and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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