After yesterday’s CPI another 2026 rate hike is firmly back on the table, with CBA out this morning saying they expect a move higher in November. As we head into September, which has delivered a -2.6% return since COVID, the step-up in hawkish concerns is likely to weigh on many sectors of the ASX. What we consider today is whether this is a time to accumulate if the weakness does prevail, and of course the best way to do so, or should we reduce exposure further to potential RBA tightening.
Real Estate: the most rate-sensitive, A-REITs typically carry meaningful debt and are valued partly relative to bond yields. Higher yields increase funding costs, make distributions less attractive versus bonds and can push cap rates higher, weighing on property valuations.
- Consumer Discretionary: Higher rates directly squeeze household disposable income, particularly given Australia’s large exposure to variable-rate mortgages. Tighter financial conditions weigh on consumer confidence and spending, with big-ticket and discretionary purchases particularly vulnerable.
- Industrials: The sector includes many capital-intensive infrastructure, construction and engineering businesses. Higher yields increase financing costs and discount rates, potentially slowing investment activity.
It’s not the clearest of charts we’ve put together, but the trend below is clear: as 3-year bonds (the white line) fall (yields higher), the above 3 sectors follow suit even in a net bullish market, as has been the case over recent years. Hence, if we are wrong and Australian 3’s do continue to fall, suggesting the RBA hikes more than once into Christmas, there’s no hurry to increase exposure to the likes of real estate and retail.
- Credit markets are pricing in one 0.25% hike into Christmas; any deviation from this is likely to impact bonds and stocks accordingly.
