Weekly financial market update - 27th of February 2023

Markets again drifted lower, as rate expectations continue to move higher in response to stronger than expected macro data. In the US, stronger than expected consumer spending, a hotter than forecast core PCE price index (Fed preferred measure of inflation) and data highlighting a stubbornly tight labour market has seen peak US rate expectations move to 5.40% (4.50-4.75% current), with expectations for H.2 rate cuts now removed. In Australia, hawkish takeaway's from the February RBA meeting has driven futures markets to price a cash rate of more than 4.2% by August (3.35% current).

This repricing of rate expectations has weighed on equity markets, which had rallied year to date on the misplaced prospect of a Fed (and RBA) pause/pivot amidst initial signs of decelerating inflation, and the growing expectation of a goldilocks soft / no landing scenario.

The S&P 500 was -2.7% for the week (+3.7% YTD), including a -1.1% move on Friday night our time. The NASDAQ was -3.3% (+9.0% YTD). The S&P/ASX 200 was -0.2% (YTD +4.2%), with Resources (-2.3%) again weaker. Industrials were +0.6. S&P/ASX 200 futures suggest a -0.7% open to the week.

KEY MARKET DRIVERS

• Stronger than expected US consumer spending and PCE price index numbers, whilst lower than expected initial claims data continued to highlight a stubbornly tight US labour market. This combination fueled fears that the US economy is not responding to the Fed’s rate rises and that more will be required.
• Futures markets are now pricing a peak Fed funds rate of 5.40% (current 4.50-4.75%), whilst H.2 2023 rate cuts have been all but priced out of the market. This repricing of rate expectations in recent weeks has weighed on equity markets which had rallied on the misplaced prospect of a Fed pause/pivot amidst initial signs of decelerating inflation, and the growing expectation of a goldilocks soft / no landing scenario.
• Good news (for the economy) is again being treated as bad news (for markets). Recent macro data continues to highlight resilient developed market economies, suggesting central banks have more work to do. Whilst positive for nearer term earnings estimates, a further stretching of the interest rate rubber band raises the prospect of a policy-induced recession, with more significant implications for future earnings.
• Hawkish takeaways from the RBA's February meeting this week drove implied peak cash rate forecasts to 4.3% by August, implying four more increases from 3.35% currently. This moderated slightly later in the week following a lower-than-expected rise in the 4Q2022 wage price index, which has taken on greater importance with the RBA clearly focused on the risks of a price-wage spiral.
• The rate at which companies are positively surprising waned through this domestic results period. Slightly more ASX companies missed than beat on their reported half yearly profit, illustrating softening earnings momentum and a likely peaking in the operating environment. Aggregate NTM EPS estimates have been lowered by -0.5% since the start of the earnings season. We will look to unpick this more in future weeks.
• China’s Politburo meeting Tuesday repeated its pledge to boost economic growth, reinforcing expectations of more policy support aimed at boosting consumption, investment, and the property market. This comes amidst signs that China's economy is rebounding faster than expected. Manufacturing swung back to expansion last month and high frequency indicators around activity are tracking positively.

MACRO / ECONOMIC NEWSFLOW

• February RBA minutes noted that the RBA had both a 50 b.p. and a 25 b.p. rise under consideration, but no a pause ‘no hike’ option (which was considered in December). Noted were “…a pattern of incoming prices and wages data exceeding expectations, and a risk that high inflation would be persistent”.
• On the decision to hike +25bp, the RBA minutes noted "uncertainty around the outlook and the monthly meetings provided the Board with frequent opportunities to assess how these uncertainties were being resolved and to adjust policy if needed. With interest rates already having been adjusted substantially, there was less need to move by 50 basis points at this meeting."
• Australia's Wage Price Index (ex. bonuses) increased +0.8% q-o-q in 4Q2022, with the annual rate rising +10 b.p. to 3.3% y-o-y. The outcome was below expectations for +1.0% q-o-q, +3.5% y-o-y) and marked an easing in sequential momentum compared to the outcome in 3Q2022 (+1.1% q-o-q).
• US consumer spending, which accounts for more than two-thirds of US economic activity, rose by +1.8% in January. This was the most in almost 2 years, and above expectations for +1.3% (December -0.1%).
• Core PCE prices in the US, which exclude food and energy, jumped by 0.6% m-o-m in January, hotter than market estimates of 0.4% (December +0.4%). The annual rate, the Federal Reserve’s preferred inflation measure, rose by 4.7% (December +4.3%) and surpassed market expectations of 4.3%.

MAJOR SHARE PRICE MOVES - S&P/ASX 200

• Eagers Automotive +21.7% In line FY22 result however elevated order book (+74% v p.c.p. and +29% v Jun22) & positive margin outlook saw upgrades, FY23 guidance likely conservative
• Inghams Group +17.5% Result above expectations. Improvements from disrupted FY22 coming through faster than expected, positive momentum expected to continue, driving upgrades
• Origin Energy +15.4% Company receives revised $8.90 conditional bid (including a US$ component) from the Brookfield consortium, down from previous $9.00 bid on 16 February.
• Coronado Global Resources -11.2% Whilst a record result driven by strong met coal prices, the production outlook was below guidance and acquisitive intent creates near term uncertainty
  St Barbara -14.3% H.1 loss larger than expected, impacted by asset value impairments. Group FY guidance maintained albeit likely at lower (production) and upper (costs) end
• Domino’s Pizza Enterprises -25.2% H.1 network sales -4% on p.c.p., Group EBIT -21%, below expectations. Volume reaction to price rises. Soft trading update has seen nearer term sales and store rollout targets moderated

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