Shares, bonds fall: rate rise looms

Australian stock and bond markets have tumbled and the dollar has strengthened after worse than expected inflation data confirmed an interest rate rise is almost certain next week.
And with consumer prices rising at their fastest rate in six years in the June quarter - up 1.6 per cent - thanks to rising oil and fruit prices, markets are already anticipating yet another interest rate rise later this year.
The benchmark ASX 200 index fell 56.7 points or 1 per cent to 4935.7 and bond prices fell too, pushing the yield on the benchmark two-year bond to a four-year high of 6.03 per cent.
The Australian dollar traded in a half cent range against the greenback and was trading at US75.65c last night.
The ABS data, showing annual inflation now well above the Reserve Bank's target range at 4 per cent, combined with high petrol prices, record low unemployment and rising wages, have most investors betting on a rate rise next week.
"We now see a near certain probability of a 25 basis point rate hike next week, with an outside chance of 50 basis points," Westpac strategists said.
"Assuming a 25 basis point August rise, we also now expect a further 25 basis point rise in November."
Robert Cunneen from AMP Capital said that while investors found the numbers "alarming", a rate rise next week would suffice.
"If anything, the case for the 25 basis points move in the August or September period is still a close call. Hence financial markets pricing in a 6.25 per cent cash rate by year end are being overly pessimistic."
But the prospect of rising interest rates unnerved investors on the sharemarket.
Craig James, chief equities economist at CommSec, said: "Interest-rate-sensitive areas of the sharemarket such as banks and retailers are likely to experience more challenging conditions over coming months."
Retail stocks were among the biggest losers amid fears higher mortgage repayments and continuing high petrol prices will force consumers to tighten their belts.
Shares in discretionary retailers such as CD and DVD retailer JB Hi-Fi, down 20c to $4.70, and surfwear company Billabong, down 57c to $14.30, were as much as 4 per cent weaker.
Just Group and David Jones shares fell 3 per cent.
Lenders and insurers also fell amid fears margins will suffer as interest rates rise. Westpac fell 30c to $22.10 and ANZ fell 32c to $25.29.
Other financial stocks were weaker including Macquarie Bank, Bank of Queensland, Challenger Financial and Axa Asia Pacific, which all fell 3 per cent. AMP and Perpetual fell 2 per cent.
Shares in construction companies also slipped on fears higher interest rates will hit home building. Boral fell 26c or 3 per cent to $7.40 and cement maker Adelaide Brighton fell 3c to $2.43.
Investors fear the coming full year reporting season will show profit margins being squeezed by higher input and labour costs.
Despite yesterday's falls, the sharemarket remains up about 4 per cent in 2006.