Market wrap: Are interest rate hikes working?

This week the RBA raised the official interest rate by 0.5%, making it the fourth consecutive month they have raised rates.

This has resulted in fixed interest rates rises on property loans rising from around 2.5% up to around 5%, while variable rates have risen above 4%. The RBA seems intent on raising interest rates to historically normal levels, so anyone with a housing loan should be expecting to pay around 7% by the end of the year.

There is an old saying that if all you have is a hammer then everything looks like a nail, which appears appropriate right now as the RBA attempts to adjust the economy, but are these rate rises really working and are they necessary?

Looking at the ABS statistics for housing released this week, and in particular, personal and business loans, new loan commitments for housing have fallen 4.4%, while personal fixed loans have fallen by 15.2% and business purchases of property were down 19.4% in June.

So, on the surface, higher interest rates are having an effect.

If we dig deeper into the RBA report and focus on housing, we see that loans for owner occupiers, while falling 3.3%, have remained 50.2% higher than pre-pandemic levels. Loans for investment properties, on the other hand, have fallen 6.3% but remain 101% higher than pre-pandemic levels.

While these figures may seem surprising, they relate to the value of the loan, not how many loans are being written. For owner-occupiers, in four of the last six months applications have fallen, while investor applications have fallen in two of the last six months.

While the data suggests that the interest rate rises are having an effect, if we look at the statistics around mortgage stress, it seems the people who are most affected are those who can least afford it.

The best and worst performing sectors this week

The best performing sectors include Information Technology up over 4% followed by Communication Services up more than 3% and Utilities up more than 2%. The worst performing sectors include Energy down more than 1% followed by Materials, which is just in the red and Consumer Discretionary, which is just in the green for the week.

The best performers in the S&P/ASX top 100 stocks include Block up more than 16% followed by the A2 Milk Company up more than 10% and Virgin Money up more than 8%. The worst performing stocks include Orica down more than 7% followed by the Star Entertainment Group and Santos, which are both down more than 4%, while Fortescue Metals is down more than 3%.

What's next for the Australian stock market

The rise on the All Ordinaries Index has slowed, as the market is just in the green this week, which is understandable given that the second half of July was very bullish rising more than 5%. As I mentioned last week, the strong move up in July is a very good sign that the bullish run will continue, however, markets don't just rise up, they move up in stairs.

This week there has been some indecision and weakness in the market, and if it closes lower on Friday then I expect the market will fall for one or two weeks to create the next step for the move up I am expecting towards the end of the year.

That said, I will continue to recommend you be cautious, because as we have seen several times in the last few years, the market can move in either direction very quickly. One thing I am certain of is that a down move now will either confirm whether the low of 6581 on June 20 is the bottom of the bearish run this year.

Remember, we are in reporting season and while I believe we will see some good results, you need to expect the unexpected, which means the market or stocks you are looking at may be volatile for a short period of time.

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