Will a central bank pivot create a surge in equities? The charts say otherwise!

MARKETS WRAP

S&P 500 TECHNICALS

RBA WRAP + GDP PREVIEW

The Reserve Bank of Australia increased the cash rate by 25 basis points to 3.1%, the highest level in a decade. It's the eighth straight rate rise, and unlike what some economists (and many more mortgage holders were hoping for), it also didn't give any clues as to whether it will be the last. 

Dr Lowe’s usual post-meeting statement gave no indication whether the board considered a widely mooted pause to rate rises, which many economists believed would be part of the discussion. We may only know that in the meeting minutes, which are out on December 20th.

At 11:30am today, we got part two of the mega-macro dump with the Australian GDP print for Q3. Last quarter's 0.9% effort will likely not be matched this time around, but the year-on-year print will likely be outsized given this time last year, the major cities were in lockdown. 

The biggest uncertainties will likely be in the consumer spending portion of the report, as well as the impact of those depressing company profits on wider economic growth. The consensus figure among economists is 0.7% quarter-on-quarter, with the RBA's forecast slightly higher than that. Time will tell who is right.

THE CHART

We've heard the narrative before. If central banks pivot on policy, equities and bonds will surge higher together. But what if we could disprove that narrative with market history? Today, Ian Harnett supplies our charts of the day - and they suggest a Federal Reserve pivot may not gift you what you want. 

As you can see in this chart, the US Fed funds rate is what's in the blue line. But if you took the stock-bond correlation (that is, the S&P 500 vs the US 10-year nominal yield) and placed that against this chart, what you find is that both bonds and equities often struggle long after the pivot has occurred.

The exception to this rule is July 1995, and the reason Ian thinks it didn't obey regular market history is that the yield curve had not been inverted prior to then. 

Conclusion? Wishing for a pivot may gift you exactly what you don't want. 

THE STAT

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STOCK TO WATCH 

You know the year is quieting down when there are only one or two broker moves a day. In the case of today's report, there is just one in Treasury Wine Estates (ASX: TWE). 

On the headline level, it seems like a muted call - Credit Suisse has downgraded the company to NEUTRAL from outperform. But the story is more macro-oriented and interesting than it first appears.

TWE has rallied, alongside other China-exposed stocks in the last few months. In fact, the share price is currently above Credit Suisse's $13.80 target. But more importantly, China's tariff relief is likely as far away as the lifting of its zero-COVID policy. 

In addition, the benefit from a falling Australian dollar is likely muted considering the company's hedging policy and the prospect of additional cost inflation. Just because TWE was able to find markets that aren't China doesn't mean it will get away easily.

Hans Lee wrote today's report.