RBA decision likely to push more borrowers to their limit

In a decision that will surprise few economists – or borrowers – the RBA announced a further 0.25 percent rise in interest rates when it met earlier this afternoon. This brings the current interest rate up to 3.35 percent, a 3.25 percent increase since May last year.

Prior to today’s announcement, when the interest rate was still 3.1 percent, research by Roy Morgan released at the end of last month revealed that 23.9 percent of Australian mortgage holders were ‘at risk’ of mortgage stress in the three months to December 2022. Mortgage stress is where one third or more of weekly household income is going towards mortgage repayments.

In a tight rental market, mortgage pressure has also lead more landlords to pass rate rises onto tenants.

Research director at CoreLogic, Tim Lawless, says the latest rate rise moves beyond the ‘serviceability assessments’ some borrowers passed when applying for their loans.

“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate,” he said. “The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.

“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”

Today’s decision signals the RBA’s continued efforts to use the cash rate to manage inflation, which sits at 7.8 percent annually. Time will tell whether it has been successful in curbing spending or whether, as many predict, there are more rate rises on the way. Mr Lawless said overseas economies could offer some hope to borrowers.

“Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending,” he said. “Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022, albeit from the highest level since the mid-1990s (outside of the impact from the introduction of GST in 2000).

“Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35 percent, through to another 75 basis points of hikes. However, a recent survey from Bloomberg puts the median forecast at 3.6 percent, implying one more hike of 25 basis points in the wings.”

Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.

When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.

The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.

But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.

Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.

After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.

“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”

The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.

Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.

In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.

Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.

“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”

Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.

“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.

The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.

In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.

Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.

RBA decision likely to push more borrowers to their limit

The latest hike is unlikely to be the last as inflation remains stubbornly high

Nvidia’s earnings will test Wall Street’s confidence in the AI boom.