Weekly market update - 3rd of November 2022

US markets again strengthened on Friday to round out a +4.0% weekly rise for the S&P 500. Although a pullback in bond yields value solidly outperformed growth, on the back of some disappointment concerning MegaCap tech Q.3 earnings results. META (Facebook), Amazon, Alphabet (Google), and Microsoft each traded lower.

A higher-than-expected CPI print here in Australia (+7.3% year on year at a headline level) left the RBA little choice but to raise rates a further 0.25%.  25 b.p. Rate expectations have again been lifted, with fixed interest markets pricing a 4.0% peak rate and economists largely expecting 3.60-3.85%. The Fed also meets this week, and whilst a 75 b.p. rise is expected, the market will look for any sign that policymakers have discussed a step-down in the pace of tightening. The BoC and the ECB this week signalled that a slowdown in the speed of rate tightening is approaching.

The S&P/ASX 200 was +1.6% for the week, with Industrials +2.7% outperforming Resources -1.2% as commodity prices weakened late in the week. Near-term futures contracts for Iron Ore fell below US$80/tonne on the back of a more negative outlook for global steel demand, a new Covid outbreak in China, and ongoing weakness in the Chinese property market.

Broader Market Moves:

• S&P/ASX 200 +1.6% for the week ended 28 October, MTD +4.8%, calendar 2022 YTD -5.2%
• S&P/ASX Resources -1.2% (CYTD +8.4%), S&P/ASX 200 Industrials +2.7% (CYTD -8.6%)
• S&P/ASX Small Ordinaries +2.5%, MTD +4.6%, calendar YTD -20.6%
• S&P 500 +4.0%, MTD +8.9%, calendar YTD -17.1%. NASDAQ +2.2%, calendar YTD -28.6%
• S&P 500 Value +5.6% v S&P 500 Growth +2.2%. CYTD Value -6.6% v Growth -26.5%
• US 10 yr bonds -20 b.p. to 4.02% (CYTD +250 b.p.), Australia -46 b.p. to 3.74% (CYTD +207 b.p.)
• US 2 yr yield -9 b.p. at 4.42% (CYTD +369 b.p.), Australian 2-year bonds -44 b.p. at 3.21%
• USD Iron Ore -2.0%, Oil +2.8%, Copper +1.6%, Zinc -2.6%, Nickel +3.3% Thermal Coal -1.1%,
• Gold -0.7%, AUD +1.5% ($0.641), Bitcoin +6.7% to $20,478

Key Market Drivers:

• Markets remain supported by the lower yield/weaker US dollar backdrop that has been driven in
  part by increased speculation of a step-down in the pace of Fed tightening come the December
  FOMC. This has been further aided by a string of softer-than-consensus (albeit the second tier) US economic news covering house prices, consumer confidence and another regional Fed survey.
• A busy week of US Q.3 earnings reports. 52% of S&P constituents now have reported. The combined year-on-year earnings growth rate stands at 2.2%, on track to be the lowest since Q.3'20. Big Tech earnings a focus, with META, Amazon, Google and Microsoft missing and/or disappointing.
• A higher than expected CPI print here in Australia has divided economists as to whether the RBA
  will maintain its slower 25 b.p. pace of tightening at its ‘Cup Day’ RBA meeting on Tuesday, or
  revert to a 50 b.p. rise. Regardless, most economists have lifted terminal cash rate expectations.
• This week also sees the November 1-2 FOMC meeting. A 75bp rate hike is expected, but the
  market will seek confirmation of any sign policymakers may have discussed a step-down in the
  pace of tightening. Current market pricing implies a lower 50bp move at the December meeting.
• The Labor government released its first ‘mini budget’ during the week, including updated
  economic forecasts, with few surprises. Higher tax revenues associated with elevated
  commodity prices and a strong labour market were largely banked, with the government seeking
  to build its credentials around fiscal responsibility and keen to avoid further fanning inflation.
• Increasing speculation around what regulatory measures the Government may take to intervene
  in the domestic gas market. Clear focus on both supply side and pricing mechanisms. The
  Petroleum Resource Rent Tax is also under review, so potential for a further revenue grab.
• In China, the conclusion of the National People’s Congress over the weekend brought no sign of
  movement on the COVID-zero policy and not only confirmed a widely expected third term for
  president Xi but installed loyalists throughout the Party’s top ranks. Negative market reaction,
  with the Hang Seng -8.3% for the week, the CSI 300 -5.4%, and the Shanghai Composite -4.1%.
• Iron ore prices fell over on Friday, with nearer term futures contracts trading below
  US$80/tonne. This comes on the back of a negative outlook for global steel demand. A new
  Covid outbreak in China and their continuing property slump remain factors. The IMF said that
  they do not expect a quick resolution to Chinese property concerns.

Macro / Economic newsflow:

• September quarter inflation data surprised higher. Headline inflation was 1.8% qoq (consensus
  1.6%) and 7.3% yoy. The closely watched core trimmed mean measure accelerated sharply to
  1.8% qoq (consensus 1.5%) and 6.1% yoy, its highest quarterly pace since December 1990.
• Compositionally, inflation remains broad based, with upside largely driven by strong food prices
  (+3.2% qoq, +9.0% yoy), housing (+3.2% qoq, +10.5% on p.c.p.). Within this component utilities
  were +4.8% qoq despite government rebates. Excluding rebates, utilities were +11.7% qoq, with
  electricity +15.6%. Housing construction costs +3.7% qoq and +20.7% yoy.
• Budget papers showed that retail electricity prices would rise 20% over H.2 of 2022 and a further
  30% in 2023-24. Retail gas tariffs are seen rising by up to 20% in both 2022-23 and 2023-24.
• Following the stronger than expected CPI print, NAB upgraded its forecast peak in the cash rate
  from 3.1% to 3.6%, ANZ and WBC raised expectations to 3.85% (+0.25%), whilst the CBA lifted its peak rate expectation by 25 b.p. to 3.1%. At a 3.85% terminal cash rate (+375 b.p. from Apr-22 levels), monthly repayments on a 25-year, $500,000 mortgage will have increased by $1058.
• The Budget is premised on an easing in GDP growth from +3.25% in the current fiscal year to
  +1.5% in FY2024 (prior estimate 2.5%), with the unemployment rate rising from 3.5% currently
  to 4.5% by FY2024 (3.75% prior estimate). Headline CPI inflation is forecast to peak at +7.75%yoy in 4Q2022 before easing gradually to +3.5%yoy by 2Q2024 (2.75% prior estimate).
• The USD Q3 GDP beat expectations, however details underwhelmed with no material market
  reaction. Q3 GDP rose at a 2.6% annualized rate, a bit above the 2.4% consensus. Most of the
  growth was due to a huge swing in net foreign trade, contributing 2.8%, while domestic final
  demand rose only 0.5%.
• The ECB raised its key interest rates by 75bp as expected, however now appears more inclined
  to slowdown the pace of rate hikes ahead with the statement noting “substantial progress” in
  the withdrawal of monetary policy accommodation. A less hawkish interpretation to the ECB
  triggered a decline in core global bond yields.
• Bank of Canada this week raised rates by 50bp to 3.75%, surprising most economists’ predictions for a 75bp move and follows rises of 100bp and 75bp in the previous two meetings. The BoC has hiked 350bp in 7 months. Updated forecasts see the economy slowing sharply in coming months and inflation falling sharply to below 3% by the end of next year.
• According to data from Domain, Australian capital city house prices registered their steepest
  quarterly fall on record in Q3. Sydney home values dropped 5.3%, while Melbourne and
  Brisbane saw price falls of 4.3%.

Domestic Sector Performance:

• Outperforming Sectors: REITs +6.9%, Utilities +5.6%, Industrials +3.9%, Consumer Discretionary
  +3.0%, Communication Services +2.8%, Health Care +2.5%, Financial +2.1%
• Underperforming Sectors: Materials -0.9%, Consumer Staples -0.4%, Energy -0.3%, IT +0.7%

You may also be interested in...

Follow us