Earnings undoubtedly drive share prices over the medium/long term, but when it comes to sharp short-term swings in overall market valuations/sentiment, there’s nothing like monetary policy to dictate terms for stocks, with the RBA front and centre yesterday. The correlation between the local index and 3-year bonds has been extremely close over the last year, which is the major reason MM keeps a close eye on credit markets. The RBA left interest rates unchanged on Wednesday at 4.35%, while they indicated rates would need to “stay higher for longer” to rein in sticky inflation; importantly, there was little suggestion that rates would again start to rise as many had feared. The main pressure on inflation is coming from the strong jobs market, as well as higher petrol prices, which has a knock-on effect throughout the economy – the latter is frustrating when we consider crude oil has fallen 5% in 2024.
