Weekly market update - 24th of August 2022
Written and accurate as at: Aug 24, 2022 Current Stats & Facts
The US Fed continued to temper expectations around a pivot away from its hawkish stance last week — and US 10-year yields rose 14bps to 2.98% in response. US economic data continued to paint a mixed picture, while there were some ugly inflationary prints in Europe.
Equity markets were generally quiet last week. The S&P 500 shed 1.16%, driven by softness late in the week. The S&P/ASX 300 finished up 1.32%. Commodities were generally weaker, encouraging the view that inflation pressures continue to diminish.
Fed policy
Various Fed spokespeople continued to pour cold water on the notion of an imminent shift to a less hawkish policy. St Louis Fed president James Bullard said the aim was to place “significant downward pressure on inflation” without dragging rate increases into next year. He was leaning toward another 75bp hike, pushing the rate “higher and into restrictive territory”. San Francisco Fed president Mary Daly noted that hiking 50 or 75bps next meeting would be a “reasonable” way to get rates above 3% by the end of 2023 — and a bit higher next year. Both said the Fed would unlikely reverse course quickly, rejecting the notion of a “hump-shaped” path of rate hikes followed by aggressive cuts.
The Fed is grappling with the contradiction of soft headline GDP numbers, strong payroll growth, a weak housing market, uncertainty over the extent and impact of the improving supply-chain story, and still-elevated current inflation. Hence the repeated focus on data dependency in the eight-week interval between the July and September meetings.
US economy
Retail sales data was solid. The preferred measure of core sales (excluding cars, petrol and food) rose 0.8% in July (and 9.3% annualised for the three months to July) compared to the previous three months. Higher petrol prices did not have a noticeable effect. US consumers seem happy to run down the mountain of savings they accumulated in the early stages of the pandemic. On the flip side, there was an unexpected plunge in the NY Empire State Manufacturing Index. This flags further weakness at a national level.
The NAHB housing market index fell to 49 in August, down from 55 in July. All the components — present sales, expected sales, and buyer traffic — fell in August, tracking the steep and sustained decline in mortgage demand, which is yet to find a bottom after a near 30% drop from December’s peak. July's existing home sales fell 5.9% m/m and 20% y/y to 4.81m units, the lowest since June 2020.
The US National Association of Realtors joined the National Association of Home Builders in describing the market as a “housing recession”.
Australian Economy
Australia’s Wage Price Index (ex bonuses) increased +0.7% in the second quarter of 2022. This was a bit below the expected +0.8% q/q. Annual growth accelerated 20bp to +2.6% year-on-year but remained well below headline CPI inflation (+6.1%y-o-y).
Public sector wages grew 2.4% y-o-y. Annual private-sector wage growth, including bonuses, rose to 3.3% y-o-y (2.7% ex bonuses). This is the fastest pace in 10 years. Private-sector workers receiving wage adjustments in the quarter (most workers only receive adjustments in the September quarter) achieved an average pay increase of 3.8%.
Wage-setting in Australia remains much less responsive to labour market tightness than in many countries. This helps reduce the risk of a wage-price spiral. Australia’s unemployment rate fell to a 48-year low of 3.4% in July. Measured employment fell 41k m/m (vs +25k expected). There was a divergence between the full-time component (-87k m/m) and part-time employment (+46k m/m).
Employment again rose solidly for 15-to-24-year-olds (+13.3k m/m), and the youth unemployment rate fell sharply to a new historical low.
China
The People’s Bank of China surprised the market with a 10bp cut in interest rates following weak July economic data and ongoing pressure on housing. Like many of Beijing’s recent moves, this seems to stem from further weakness rather than genuinely stimulating the economy. Due to drought, China has also had to ration power and water to manufacturers.
ASX reporting season
Earnings per share (EPS) for FY22 continue to beat expectations, with more positive surprises from ASX 100 companies and financials. Free cash flow has been better than expected, especially in the resources sector. With net dividend misses and fewer buy-backs than expected, capital returns have disappointed.
Companies seem keen to keep some dry powder on the balance sheet in an uncertain environment. Inventories are still higher than expected in the aggregate, which is a risk to earnings and may signal a slowing cycle. The number of stocks with disappointing guidance is high. So far, twice as many stocks have FY23 earnings and dividend downgrades (28%) relative to upgrades (14%). Consensus expectations for market FY23 EPS growth have moderated as a result — but remain in the low single digits.