Following last week’s hotter than feared inflation read, we explore whether inflation can be tamed without inducing a recession.

After a 25% national price rise from the 2020 COVID dip, Australian house prices are finally beginning to soften. While a significant correction seems likely a “crash” in our view is unlikely. We share our base case and view on house prices into 2023.

Despite market weakness this year US earnings have remained relatively resilient. We look at the earnings outlook and the implications for US equities.

With the US market experiencing a sharp performance reversal to start the year, we examine the history of significant “corrections” and “bear markets” to provide perspective around current market weakness.

2022 has been a tough year so far, with both equities and bonds delivering negative returns, though the Australian equity market has fared better than global equities. While the list of concerns has been growing (inflation, Russia/Ukraine, China growth), front and centre has been the fear that high inflation will prove structural, forcing overtly tight central bank policy and raising the risk of a recession next year.

As expected, the US Federal Reserve hiked interest rates by 50bps last Wednesday, lifting the target federal funds rate to a range of 0.75% to 1%, the first 50bps rise since early 2000. Meanwhile, the RBA increased the cash rate target by 25bps to 35bps, its first rate hike in almost 12 years.

Australia’s headline CPI in the first quarter jumped by 2.1% on the previous quarter, well in excess of the consensus expectation of 1.7%. This marks the largest quarterly rise since the GST-driven spike in mid 2000, though Australian inflation is still well below most other major economies.

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