Weekly market update - 14th of July 2022
Written and accurate as at: Jul 14, 2022 Current Stats & Facts
The markets endured another volatile week as we entered the second half of 2022. Overall they were positive: the S&P 500 and S&P/ASX 300 gained 2% each, and the NASDAQ lifted 4.6%. Macro themes continued to lead sentiment — everything that worked in the first half of the year is not working now, and vice versa.
We saw growth outperform and commodities underperform last week as the case for peak inflation/near-term recession strengthened. This is supportive of long-duration plays. Bond markets remain confused. Different yield curves give positive and negative signals as to the odds of a recession. When averaged, however, the yield curve remains in positive territory. We saw a 20bps increase in US 10-year bonds, up to 3.08%. Note the market is now pricing around 75bps of cuts in 2023.
The Atlanta Fed’s GDPNow tracker suggests the US is already in a technical recession, which has positive payroll data challenges.
Wages appear to be cooling off across many sectors, which suggests Covid disruptions and re-openings have been the primary driver in the past, rather than linkages to structural inflation. Looking forward, the US CPI report released on July 13 saw inflation rises 9.1%, the most significant 12-month increase in 40 years, testing the thesis around inflation having peaked.
Economics and policy
The case for peak inflation continues to build with commodity prices softening, inventory de-stocking, supply chains recovering and labour market conditions easing. Commodity prices rolled off again this week on a strong USD.
There was a slight bounce at the end of the week after reports China would provide a US$220 billion stimulus package. Retail gasoline prices were off peak levels, and futures suggest prices will further decline over the next six weeks.
Anecdotal feedback implies retail inventory levels remain elevated. But it’s still unclear if this signals consumer weakening or a shift of spending towards services and travel. June BAML credit card data supports the former, with actual expenditure declining for a second consecutive month. Spending on travel and restaurants fell for the first time since the Omicron peak.
Supply chain pressures continue to ease, with the Global Supply Chain Pressure Index declining consistently. The index is still, however, largely positive (2.41), meaning it is still elevated compared to pre-Covid levels.
We saw confusing data in the manufacturing industry, with the ISM Services index increasing while the ISM Manufacturing index for new component orders slipped to a two-year low. Global container trade volumes tracked negatively in May. On an annual basis, volumes are flat versus long-term average growth of 3%.
On the employment front, layoffs are still rising. June was a particularly tough month for the tech sector. We have seen a general hiring freeze across industries. Zooming out, jobs data is holding up better than expected, with 70% of industries seeing job gains. Unemployment is at 3.6%, average weekly hours are back to pre-Covid averages, and the three-month annualised average hourly earnings are up 4.3%.
Bonds
There is a lot of uncertainty in the bond market about the timing of a potential recession. Usually, the spread between the US 10-year and the Fed Funds rate moves in tandem with that of the 10yr - 2yr. But there has been a divergence in recent timing. We saw the 10yr - 2yr spread invert daily last week, while the 10yr Fed Fund rate spread remained positive.
This contradiction suggests that elevated volatility is likely to continue for some time. We typically need to see the 10yr – 2yr inversion averaged over a month to mean a future recession.
Markets
Confusing macro data leads to a somewhat confusing market. Despite bond yields rising, technology was the best-performing sector last week. Commodities fell with Brent crude oil down 4.1%, iron ore off 1.5% and gold losing 3.2%.
Reflecting on the first half of 2022, the US 60/40 “world retirement portfolio” had its second-worst start to the year since 1900, returning -17%. Once this result is reflected in retail investors’ report cards, there could be structural outflows in the near term. This would likely dampen the market’s positive start to 2H22 and affect broader performance.
In Australia, performance was optimistic last week despite resources retreating. The RBA’s 50bps rate hike was in line with expectations and had minimal impact on the ASX. There was a slight rally in long-duration growth, suggesting some relief in expectations.
Stocks
Last week was very quiet for stock-specific news. Macro factors drove the outperformance.
Suncorp (SUN, +1%) and Insurance Australia (IAG, +0.5%) updated the market on new reinsurance terms. Both indicate interest rate rises will likely offset a headwind from increased reinsurance and catastrophe budgets, with unchanged guidance for margin expansion into FY23.
Chalice Mining (CHN, +8%) saw a slight bump after a new nickel discovery was announced. It is still very early days, with 6-8 weeks away.
Viva Energy (VEA, -2%) and Ampol (ALD, -0.6%) dipped, noting refining margins have moved off their peak. Nevertheless, both companies’ refiner margins are still robust and well above the market’s long-term expectations. These should be reflected in the upcoming reporting season in August.