Weekly market update - 17th of October 2022

A modest week-on-week move in Australia (S&P/ASX 200 -0.1%), was largely held up by a +4.0% rise in the Banks. This was on the back of positive margin commentary from the Bank of Queensland, which quickly translated across the sector. Most other sectors traded lower.

The S&P 500 in the US had another volatile week, -1.5% and -24% calendar YTD. This week saw a hotter-than-expected CPI print, a Michigan survey that saw a modest rise in inflationary expectations, together with September FOMC minutes which reinforced that the Fed sees the risk of doing too much as outweighed by the risk of doing too little in bringing down inflation. This all reinforced a likely higher-for-longer approach, sending peak rate expectations per fixed interest markets higher in the US (and Australia). Bond yields rose and equities declined.

The S&P 500 closed -2.4% on Friday on the back of these inflationary (and therefore rates/growth) dynamics, with the S&P/ASX 200 futures pointing to a -1.5% start to the week.

The RBA will on Tuesday release minutes from the October board meeting. The market will focus on debate around the decision to slow the pace of the rate rise to 25 b.p., and any discussion on the appropriate path forward.

Broader Market Moves:

• S&P/ASX 200 -0.1% for the week ended 14 October, calendar 2022 YTD -5.6%
• S&P/ASX Resources -1.4% (CYTD +11.8%), S&P/ASX 200 Industrials +0.5% (CYTD -10.2%)
• S&P/ASX Small Ordinaries -2.4%, calendar YTD -22.4%
• S&P 500 -1.5%, calendar YTD -23.9%. NASDAQ -3.1%, calendar YTD -33.6%
• S&P 500 Value -0.3% v S&P 500 Growth -2.9%. CYTD Value -15.0% v Growth -31.8%
• US 10 yr bonds +13 b.p. to 4.01% (CYTD +250 b.p.), Australia +16 b.p. to 4.01% (CYTD +234 b.p.)
• US 2 yr yield +19 b.p. at 4.50% (CYTD +377 b.p.), Australian 2 year bonds +11 b.p. at 3.39%
• USD Iron Ore +0.3%, Oil -8.0%, Copper -0.9%, Zinc -3.3%, Nickel -2.0% Thermal Coal +1.7%,
• Gold -3.5%, AUD -2.6% ($0.624), Bitcoin -1.5% to $19,110

Key Market Drivers:

• Hotter than expected core CPI rise in the US, and slightly higher inflationary expectations in
  Michigan surveys have further steepened Fed rate path expectations, putting pressure on
  markets. Equities sold off late in the week and bond yields rose. Implied peak rates in the US
  rose by 31 b.p. this week to 5.0% (May-23) versus the current 3.00-3.25%, whilst also dragged higher in Australia (+19 b.p.) to 4.0% (Nov-23) versus 2.60% current RBA cash rate.
• Narrow performance in Australia, with large index, weighted Financials (+3.1%) one of few
  sectors to outperform. This was driven by a better-than-expected margin result and a forward
  outlook from the Bank of Queensland, reminding investors of the positive leverage from rising rates. We caution investors that fierce competition and the progressive maturity of cheap funding
  from the Covid period Term Funding Facility (TFF) may truncate and/or moderate margin expansion.
• The fallout from the recent UK mini budget continues, with PM Truss announcing a partial reversal of plans. This includes deciding to now keep the increase in corporate tax from 19% to 25% from April 2023, and scrap the proposed reduction in the high-income tax rate from 45% to 40%. Chancellor Kwarteng was sacked, whilst speculation now surrounds the future of new PM Truss.
• September FOMC minutes showed officials were concerned that the cost of doing too little to
  bring down inflation outweighed the cost of too much, though noted risks would become more
  two-sided as policy moved into restrictive territory. Some also said that it would be important to
  calibrate the pace of further tightening to mitigate the risk of significant adverse effects on the
  economic outlook. Affirmed their strong commitment to the 2% inflation objective, stressing the
  importance of staying the course even as the labour market slowed.

Macro / Economic newsflow:

• Per the NAB survey, Australian business conditions remained strong in September (+3pts to
  +25), rising to the highest level outside of the initial post-lockdown surge in early 2021. Business
  confidence eased -5pts to +5, around its long-term average.
• Trading conditions improved sharply, while the profitability and employment sub-indexes
  remained elevated. Measures of price pressures eased modestly in the month but remained
  elevated in levels terms, pointing to ongoing inflationary pressures in the near-term
• WBC consumer sentiment -0.9% mom to 83.7pts in October, remaining near cycle lows. Notably,
  those surveyed after October's dovish RBA meeting reported materially improved sentiment.
• The RBA will on Tuesday release minutes from the October board meeting. The market will pay
  close attention to any debate around the decision to slow the pace of the rate rise to 25 b.p. in
  October, as well as any discussion around the appropriate path forward.
• Headline September US CPI up 0.4% mom, hotter than consensus for 0.2% and highest since
  June. Annualised growth is 8.2% ahead of 8.1% estimates. Core CPI (ex-food and energy) of 0.6% is also higher than the 0.4% consensus, while the annualised core of 6.6% against 6.5% estimates. Services continued to add upward pressure.
• October preliminary Michigan Consumer Sentiment up 1.2pts mom to 59.8, ahead of consensus
  estimates for 59.0 and highest since April. However, the bigger focus was on inflation expectations, with one-year inflation expectations up 0.4 pp mom to 5.1%, the first rise since March and the highest since July. Five-year inflation expectations are also up 0.2 pp to 2.9%, flat on a year ago.
• IMF cut its 2023 global GDP forecast, warning about a third of the global economy faces two
  consecutive quarters of contraction. Global growth is forecast to slow from 6.0% in 2021 to 3.2%
  in 2022 (Euro 3.1%, US 1.6%) and 2.7% in 2023 (Euro 0.5%, US 1.0%). This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of Covid.
• Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 Before moderating to 6.5%
  in 2023 and to 4.1% by 2024.
• September FOMC Minutes, hotter than expected inflation numbers, and higher Michigan
  inflation expectations reading have seen odds of a 75 b.p. hike in November rise to 97% (81% a
  a week ago), while the futures market is now pricing ~5.0% peak fed funds rate by May 23.

Domestic Sector Performance:

• Outperformers: Financials +3.1%, Consumer Staples +0.4%, Consumer Discretionary +0.3%
• Underperforming Sectors: Information Technology -3.0%, Health Care -2.9%, Utilities -2.3%,
  REITs -2.2%, Energy -1.5%, Materials -1.2%, Communication Services -1.1%, Industrials -0.2%

Other snippets of interest:

• The US announces further restrictions on China's access to US-made semiconductor technologies.
• Treasurer Jim Chalmers explicitly rules out touching the stage-three tax cuts in the October
  budget….however left the door open for them to be rolled back or amended in future budgets

Charts of interest:

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