Weekly market update - 17th of May 2022
Written and accurate as at: May 17, 2022 Current Stats & Facts
We saw more of the same last week in terms of the market’s thematic drivers. Inflation persists, the Ukraine conflict grinds on, Chinese lockdowns remain in place, parts of the crypto space are unwinding and global growth is slowing. Market participants remain on edge as a result. The US inflation print didn’t serve as a circuit breaker. The headline number declined, but less than expected.
The S&P 500 fell 2.35% and the NASDAQ lost 2.77%. The S&P/ASX 300 was off 1.73%. The week’s falls were softened by a strong rebound on Friday. Commodity prices have given up recent gains. Mega cap growth names in the US have also rolled over, now adding to index weakness now rather than holding things up.
The withdrawal of liquidity is making itself felt in speculative, profitless business models. Last week this manifested in the crypto market. While details, exposures and implications are likely to be revealed in the coming weeks, the issue is the potential for any second-order impact on the broader system. US Treasury Secretary Janet Yellen said it did not count as “a real threat to financial stability”, but this needs to be watched.
The quarterly reporting season in the US shows consensus annual earnings for the S&P 500 remain intact for FY22 and FY23. That said, the market has become a bit narrower in this regard, with energy doing a lot of the heavy lifting. It is also notable that on the back of this reporting season, corporate activity in buybacks and capex spending is up strongly for the US.
Fed policy
The Fed continued to reinforce the expectations of a series of 50 bp hikes. Fed Governor Powell said tackling inflation would “include some pain” as the impact of higher interest rates was felt — but that was preferable to prices continuing to rise. The Fed was “prepared to do more” if data turned the wrong way, he added. That said, Altanta Fed President Bostic noted that a 75bp hike was still a low probability outcome. There were signs of improvement in a number of supply chain issues, he said. For example, trucking companies are no longer turning down business and shipping bottlenecks are easing. He sees as yet unrealised downside risks to demand from the squeeze on finances.
US Inflation
The inflation rate fell, but not as far as some hoped. The April CPI measure rose 0.3% month-on-month, ahead of the 0.2% consensus. Core CPI (excluding food and energy) rose 0.6% month-on-month versus 0.4% expected. Headline inflation fell from 8.5% to 8.3% and core from 6.5% to 6.2%, helped by base effects.
While we have passed the peak, price growth remains very elevated and consumer expectations conflating “peak inflation” with falling prices may cause some consternation. Overall, it was a disappointing set of numbers, with core elements of inflation proving to be sticky.
Some details worth considering:
- Used vehicle prices fell only 0.4% and new car prices rose by 1.1%.
- Rents rose 0.5% and are proving very resilient.
- Plane tickets rose 19%, reflecting booming demand and airlines successfully passing through fuel price increases.
Overall the number of CPI components seeing price growth remains very broad by historical standards. While inflation is starting to decline in some goods, it is just starting to pick up in services. This is feeding through to measures of consumer sentiment, which have ticked down. The petrol price, which is important to consumer hip pockets and inflation prints, continues to remain very high.
There are some signs of pressure in the labour market easing, with the initial unemployment claims 4-week average climbing 22,000 to 193,000 over the last month. The EVRISI Trucking survey, historically a good measure of economic pulse, also continues to track down, which suggests softer economic growth.
Australia
At this point, the implied path of rate rises in Australia is similar to the US — despite our goods and wages inflation is nowhere near the US experience. We are seeing private-sector wage growth come through in Australia, but it is well below the US and is expected to peak at 3.7% in 2024.
We are keeping an eye on the New Zealand economy, where rate increases have led to falls in house prices. The question is whether this causes an air pocket in consumer spending at some stage in the remainder of 2022.
Markets
We saw significant dislocation in crypto markets as stable coin TerraUSD, with US$18 billion of value, lost its peg to the dollar. The events that precipitated the crash appear to be analogous to a traditional bank run in the non-digital world, coupled with a good old-fashioned short squeeze. The sentiment wasn’t helped when crypto exchange Coinbase quarterly reported a loss of US$430 million, citing 20% fall in monthly transacting users.
Elsewhere, commodity price falls on the back of further China lockdowns and increased prospects for a European recession saw resource stocks giving back a lot of the recent gains.
Value continues to win out over shares in growth companies. The mega-cap tech names in the US are at last reflecting the pain felt elsewhere across the market.
The bond market stabilised and is no longer going down in lockstep with equities. US 10-year government bond yields fell 21bps. The Australian equivalent fell 7 bps.
The Australian equity market held up better, but less so than in past weeks as the resource sector saw some pressure. Weakness across the technology, lithium, gold, base metals and REITs sectors contrasted to financial strength on the back of some recent results. CSL (CSL, +4.5%) was among the best performers, on positive news flow on plasma collection.
Importantly, several recent updates and results have been well received, including from Orica (ORI, +3.0%), Amcor (AMC, +2.9%), Ampol (ALD, +2.7%), National Australia Bank (NAB, +0.8%), Westpac (WBC, +0.7%) and QBE (QBE, +0.5%).
Xero’s (XRO, -2.8%) FY22 result came in slightly ahead of consensus at the revenue and EBITDA lines. It ends the period with 3.271m subscribers, with 530,000 net additions for the year, equating to 19% growth. This was 2% below consensus expectations. New additions were strong in Australia and New Zealand, but disappointed in the UK. Overall, it was a solid result with unit economics continuing to hold up well. Consensus revenue numbers for FY23 and FY24 look too low in our view and may drive upgrades. The stock’s muted reaction seems to be in response to a lack of cash flow generation in the current environment, as XRO continues to invest heavily to drive its growth opportunity and acquire new subscribers.
Commonwealth Bank (CBA, -0.1%) issued a solid quarterly trading update. Volume growth remains strong, with market share gains in business lending and deposits, though mortgage lending slowed over the course of the quarter. Net interest margins (NIMs) remained under pressure from competition in mortgages. Seasonally lower costs and stronger Treasury income led to flat Pre-Provision Profits. It trades on 19x next twelve-month P/E and 4% dividend yield.
Westpac’s (WBC, +0.7%) result ended up being a bit better than feared, beating pre-provision operating profit consensus by 5%, driven by better cost control. WBC has not been as explicit as peers in quantifying the benefits of higher rates, but margins as they exited the period are better than the market has been forecasting. That said, lending volumes remain under pressure and there is still a lot more to be done on costs.
Orica’s (ORI, +3.0%) delivered a good result that beat expectations by 6% at the EBITDA line and by 13% at EBIT. This was the result of a strong showing in Asia Pacific, with North America missing expectations by 5%.