Weekly market update - 14th of November 2022

A better-than-expected October inflation printout of the US set markets alight late in the week, with equities rallying, bond yields declining, and the USD index declining (AUD +4.1% for the week). Seen as potentially confirming that we have seen peak inflation, raising the probability of a lower 50 b.p. US rate rise in December, taking some of the recent heat out of terminal rate expectations.

The S&P 500 +5.9% for the week, whilst the NASDAQ was +7.4%, with several mega-cap tech stocks rallying strongly (NASDAQ still -27.1% calendar YTD). The S&P/ASX 200 was +4.0%, with Resources +6.8%, reflecting signs of some easing to Covid restrictions out of China (positive for growth/commodity demand).S&P/ASX 200 Industrials were +3.0%. Gold stocks were strong, with the All Ordinaries gold index +17.5% for the week.

Positively, the US market held onto its strong Thursday gains on Friday, the S&P 500 rising +0.9%. The S&P/ASX 200 futures are pointing to a +0.6% rise.

Broader Market Moves:

• S&P/ASX 200 +4.0% for week ended 11 November, MTD +4.5%, calendar 2022 YTD +0.2%
• S&P/ASX Resources +6.8% (CYTD +19.8%), S&P/ASX 200 Industrials +3.0% (CYTD -5.1%)
• S&P/ASX Small Ordinaries +4.1%, MTD +4.2%, calendar YTD -15.8%
• S&P 500 +5.9%, MTD +3.2%, calendar YTD -15.1%. NASDAQ +8.1%, calendar YTD -27.1%
• S&P 500 Value +3.8% v S&P 500 Growth +8.4%. CYTD Value -4.1% v Growth -24.9%
• US 10 yr bonds -34 b.p. to 3.82% (CYTD +231 b.p.), Australia -20 b.p. to 3.66% (CYTD +199 b.p.)
• US 2 yr yield -36 b.p. at 4.32% (CYTD +359 b.p.), Australian 2-year bonds -19 b.p. at 3.09%
• USD Iron Ore +6.6%, Oil -3.9%, Copper +6.8%, Zinc +5.5%, Nickel +9.6%, Thermal Coal -6.5%,
• Gold +5.6%, AUD +4.1% ($0.670), Bitcoin -24.1% to $16,050

Key Market Drivers:

• Markets rallied strongly late in the week after the October CPI print for the US came below
  expectations at 0.4%. This potentially confirms we have seen peak inflation, raises the probability of a lower 50b.p. rate rise in December, and dampens some of the recent upside risks to terminal
  rates. Treasuries were sharply higher (yields lower), whilst the US Dollar index weakened.
• Thursday's rise for S&P 500 (+5.5%) the strongest since Apr-20, and the Nasdaq (+7.4%) since Mar-20.  The tech rout, a major component of the downward pressure on US markets, turned around on Thursday. Mega-cap tech stocks were some of the biggest winners. Over the week, Meta +24.5%, Microsoft +11.6%, Alphabet +11.4%, Amazon +10.8%, and Apple +8.2%.
• Commentary from Fed members also leaned more dovish after this data, with several suggesting
  it may be time to slow down the pace of hikes, though pausing is not yet a point of discussion. One member (Harker) said he favours a pause at 4.5%, below current terminal rate pricing.
• In Australia, there is a stark divergence between what the consumer is saying and what they are
  doing. Most recent retail sales data remains very positive, whilst consumer sentiment continues
  to decline to recessionary levels. A strong labour market likely explains this, although the
  latest consumer sentiment survey saw the first signs of employment uncertainty rising.
• Some easing of strict Covid rules in China saw strong positive reactions in Chinese markets (Hong Kong Hang Seng +7.7% Friday, CSI 300 +2.8%), also commodities markets. The small changes, including shortening quarantine periods by 2 days, are seen as potentially paving the way for gradual reopening. The acceleration of a lagging vaccination program remains key to sustained progress.

Macro / Economic newsflow:

• US headline October CPI 0.4%, below consensus 0.6% (September 0.4%). Annualised CPI down from 8.2% September to 7.7%, below consensus estimates of 7.9%, first print <8% since
  February. Core CPI (ex. food and energy) of 0.3% below consensus estimates of 0.5%, down from September 0.6%. Annualised Core down from 6.6% at September to 6.3% (consensus 6.5%).
• The Westpac/Melbourne Institute survey of consumer sentiment crashed in Nov-22 by a further
  6.9% mom, to a recessionary level of just 78.0, down 25.9% yoy and ~23% below average. In
  levels terms, sentiment is now below the trough during the GFC (79 pts) and only slightly above
  the trough during the initial COVID lockdowns (75.6 pts)
• A notable divergence has started to occur between those with a mortgage and those who own
  outright. Confidence levels for those with a mortgage fell -15.7% to 68.4, compared to a rise of
  1.9% to 82.4 for those who owned outright. Higher rates starting to impact sentiment.
• NAB Business Survey business conditions edged a touch lower to +21.9 in October, although only modestly off the Sep-22 cycle high of +23.3. Business confidence is softening, down to +0.2 and at the lowest level since 2021. Key components of the survey were mixed, with trading conditions and employment easing from elevated levels but profitability improving somewhat. Measures of price pressures were also mixed but remained elevated overall.
• November Michigan Consumer Sentiment index is down 5.2 points to 54.7, missing estimates for
  59.4. Current conditions index is down 7.8 points to 57.8, while the index of consumer expectations is down 3.5 points to 52.7. One-year inflation expectations up 0.1pp to 5.1%, the highest in four months and a second-straight monthly increase. Five-year inflation expectations up 0.1pp to 3.0%, the highest in five months

Domestic Sector Performance:

• Outperforming Sectors: Utilities +15.2%, Materials +8.7%, Health Care +5.6%, REITs +5.6%,
  Consumer Discretionary +4.4%, Consumer Staples +4.3%
• Underperforming Sectors: Energy -2.4%, Information Technology +0.4%, Financials +1.5%,
  Communication Services +1.9%, Industrials +2.4%

Major share price moves, S&P/ASX 200:

Chart of interest:

Significant divergence from what consumers are saying and what they are doing.

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