OPINION: Once prices adjust downwards to the new clearing levels demanded by much higher rates, future valuations will likely track incomes.
. And it comes at the perfect time for the long-anticipated “pivot” by the US Federal Reserve, triggering an exceptionally strong bounce in equities and correlated crypto.
It now seems like a lock to lift by 50 basis points only, which should be followed by another 25 basis points at its February and March meetings, delivering a 5 per cent policy rate. This is broadly in line with the terminal Fed rate that is priced by the market.
House prices, arguably the best real-time economic data that exists, are recording their sharpest correction ever.The number of jobseekers per role has surged alongside record numbers of new migrants returning, which will mitigate acute labour shortages that were fuelling wage growth. Will this be the beginning of a new melt-up? It is very unlikely. While finally setting sight on the central banks’ terminal cash rates is crucial for stable asset pricing – and could easily trigger another striking bear market bounce – the reality is that the new normal of structurally higher borrowing rates remains unambiguously in place.
And there is no serious prospect of the post-GFC reflex of huge asset price gains in response to zero interest rates and untrammelled money printing given the easy money days have long passed. Once prices adjust downwards to the new clearing levels demanded by much higher rates – which will probably take another 12-18 months in the more illiquid sectors – future valuations will likely track incomes in the absence of interest rate relief.
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