Market update - 7th of October 2022

It's not often that little old Australia drives global markets however the less than expected 25 b.p. rate rise from the RBA this week (21/28 economists expected +0.50%) set markets alive with anticipation that central banks might be getting closer to the end of the tightening cycle, and/or a slowing pace of tightening at the very least lowers policy driven recessionary risks. Why does it feel like deja vu all over again ? Sure enough, the very next positive data point (this time US unemployment unexpectedly declining), as well as some further strong raise-and-hold/higher-for-longer messaging) from Fed representatives saw some retracement latter in the week. The US CPI print this week will be closely monitored. 

The S&P 500 broke its 3 week streak of losses totalling around 12%, rising +1.5%. S&P/ASX 200 +4.5% over the week (Industrials +3.8%, Resources +6.3%), with energy again the strong outperformer. The S&P 500 closed -2.8% on Friday on the back of these strong jobs numbers / lower unemployment, with the S&P/ASX 200 futures pointing to a -0.9% start to the week.

Broader Market Moves:

• S&P/ASX 200 +4.5% for week ended 7 October, calendar 2022 YTD -5.5%
• S&P/ASX Resources +6.3% (CYTD +13.4%), S&P/ASX 200 Industrials +3.8% (CYTD -10.6%)
• S&P/ASX Small Ordinaries +4.8%, calendar YTD -20.5%
• S&P 500 +1.5%, calendar YTD -22.7%. NASDAQ +0.7%, calendar YTD -31.5%
• S&P 500 Value +2.1% v S&P 500 Growth +0.9%. CYTD Value -14.8% v Growth -29.8%
• US 10 yr bonds +9 b.p. to 3.88% (CYTD +237 b.p.), Australia -4 b.p. to 3.85% (CYTD +218 b.p.)
• US 2 yr yield +10 b.p. at 4.30% (CYTD +358 b.p.), Australian 2 year bonds -3 b.p. at 3.28%
• USD Iron Ore -2.7%, Oil +15.9%, Copper -0.9%, Thermal Coal -11.0%, Gold +2.3%
• AUD -0.4% ($0.641), Bitcoin -1.5% to $19,410

Key Market Drivers:

• Whilst pulling back late in the week, markets closed higher. This snapped a 3 week losing streak
  for the S&P 500 which had retraced ~12%. Whilst oversold conditions, depressed sentiment
  were cited, there was also some renewed pickup in Fed policy pivot speculation aided by the
  RBA slowing its pace of rate increases. Much of this optimism waned by the end of the week…
• The Fed was unrelenting in its raise-and-hold/higher-for-longer messaging again this week.
  Fedspeak featured some meaningful pushback against expectations for rate cuts in 2023. The
  September jobs numbers coming in better than anticipated, and an unexpected decline in the US
  unemployment rate to 3.5%, also dented hopes for a less aggressive Fed.
• Odds of a 75bp rate rise at the next Fed meeting on November 2 rose from 82.3% to 94.1%
  overnight (56% a week ago and 1% a month ago). The odds of yet another 75bp rate rise at the
  December 14 meeting rose from 7.4% to 23%. The bond market now views that the Fed are
  going to stay aggressive from here to Christmas. US CPI data this week will influence this.
• The RBA increased the cash rate +25bp to 2.60% at October’s Board meeting, a dovish surprise
  relative to consensus expectations. 21/28 economists expected +50bp. This differs from global
  central bank peers where large rate hike sizes are expected to be maintained or even increased.
• The RBA noted that rates had risen significantly and quickly, and seeks to assess the impact of
  rate increases to date, conscious of over tightening into a global slowdown. It believes
  Australia’s inflation and wages dynamics are different and whilst focused on taming inflation,
  remains sensitive to employment and growth consequences when setting monetary policy.
• Oil prices rebounded strongly during the week on speculation (and then confirmation) of OPEC+
  quota reduction. Reduction of 2m barrels/day from November, in an effort to stabilise prices and
  encourage further investment. Higher oil prices pose a further headwind to demand and growth.

Macro / Economic newsflow

• Australian capital-city dwelling prices fell -1.4%mom in September, to be -5.5% below the April
  peak. Sydney prices fell -1.8%mom to be -9.0% below their peak in January, while prices in
  Melbourne fell -1.1%mom to be -5.6% below their peak
• The RBA’s Financial Stability Review suggested households with variable rate mortgages had
  likely experienced a ~10% decline in discretionary cash flows to date. Assuming rates continued
  to rise another ~100bp, the analysis suggests ~50% of households would ultimately experience a
  ~20% decline in cash flow, with ~15% falling into negative cash flow.
• Speech by Treasurer Jim Chalmers, in which he warned of budget pressures from annual NDIS
  spending growth of 12% and a 14% rise in government debt servicing costs over the next four
  years. Reiterated that we would see difficult decisions in the October budget. Implied that
  breaking Labor's promise to leave Stage 3 tax cuts untouched may be necessary.
• Residential building approvals +28.1%mom in August, beating expectations for +9.0%mom. The
  rebound was driven by the volatile higher-density sector, which fell sharply in July. The value of
  approvals for home renovations also rebounded in the month.
• Housing finance approvals fell -2.7%mom for owner-occupiers (-15.1%yoy) and -4.8%mom for
  investors in August (-6.4% yoy). This was broadly in line with expectations. Owner-occupied
  approvals remain elevated, albeit now -15.8% below the 2021 peak.
• The RBNZ lifted the Official Cash Rate (OCR) by 50bp to 3.5%, as expected. The RBNZ maintains
  that it remains appropriate to continue to tighten policy "at pace" and that further tightening is
  needed to create sufficient restraint on spending to return inflation to 1-3% target.
• US nonfarm payrolls rose by 263k in September, a bit higher than 250k consensus (August 315k).  The unemployment rate moved lower to 3.5% against expectations for 3.7% (August 3.7%). The Labour force participation rate edged down to 62.3% (62.4% in August), still well below pre-Covid highs.

Market Snippets

• Outperforming Sectors: Energy +10.2%, Utilities +6.0%, IT +5.8%, Financials +5.2%, Materials +5.0%,
• Underperforming Sectors: Consumer Staples -0.1%, Communication Services +2.0%, Health Care. +2.1%, REITs +3.2%, Industrials +3.3%, Consumer Discretionary +3.9%

Other snippets of interest

• Based on current 250 b.p. cash rate rises to date, 45% of variable rate borrowers face a >20% increases in dollar value of monthly repayments
• If cumulative cash rate rises 350 b.p. (futures markets imply ~370b.p.) 25% of variable rate borrowers would face minimum loan payments of more than 30% of their income
• 35% of outstanding housing loans are fixed rate, with 2/3 of these loans due to expire by end 2023. Most of these borrowers will be rolling over to rates which are 3-4% higher than current
• In a scenario where home prices fall 20%, the RBA estimated ~3% of total loans and ~20% of new first-home buyer loans would fall into negative equity
• The number of new housing listings in capital city markets over the four weeks ending September 25th was -12% lower than the same period last year -10% below the 5 year average
• Outbound tourism spending for August rose above inbound tourism spending for the first time since early 2020

Charts of interest

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