Financial market update - 21st of November 2022

More modest moves across both equity and bond markets this week. Debate continues as to whether the most recent rally, on the back of a softer-than-expected inflation read out of the US (peak inflation ?), some tweaking of China Covid zero policy, and property sector support, is just another bear market rally. The UK felt another inflationary jolt during the week, whilst US Fed officials continue to push a 'higher for longer' narrative.

The S&P 500 was -0.6%, holding the majority of the prior week's gains. The S&P/ASX 200 was +0.1%, with Resources +1.2% v Industrials -0.2%. The S&P 500 was +0.5% on Friday, with the S&P/ASX 200 futures pointing +0.3% higher.

Broader Market Moves:

• S&P/ASX 200 +0.1% for the week ended 18 November, MTD +4.6%, calendar 2022 YTD +0.3%
• S&P/ASX Resources +1.2% (CYTD +21.2%), S&P/ASX 200 Industrials -0.2% (CYTD -5.3%)
• S&P/ASX Small Ordinaries -0.8%, MTD +3.3%, calendar YTD -16.5%
• S&P 500 -0.6%, MTD +2.6%, calendar YTD -15.6%. NASDAQ -1.5%, calendar YTD -28.2%
• S&P 500 Value +0.0% v S&P 500 Growth -1.3%. CYTD Value -4.1% v Growth -25.9%
• US 10 yr bonds +0 b.p. to 3.81% (CYTD +230 b.p.), Australia -4 b.p. to 3.62% (CYTD +194 b.p.)
• US 2 yr yield +18 b.p. at 4.50% (CYTD +377 b.p.), Australian 2-year bonds +4 b.p. at 3.12%
• USD Iron Ore +2.5%, Oil -8.4%, Copper -4.7%, Zinc +0.0%, Nickel -4.5%, Thermal Coal +5.1%,
• Gold -0.8%, AUD -0.1% ($0.669), Bitcoin +2.9% to $16,520

Key Market Drivers:

• The debate as to whether the recent rally, sparked by peak inflation momentum, some tweaking of China Covid zero policy, as well as property sector support, is just another bear market rally.
  Some Fed officials continued to push the ‘higher for longer’ narrative despite recent signs of
  easing inflationary momentum.
• Growth concerns also back in the headlines with the cautious consumer discretionary takeaways
  from the Target result in the US, the deterioration in homebuilder sentiment, and pickup in
  corporate cost-cutting and layoff announcements. Takeaways from earnings in the US, AGM
  commentary in Australia, and broader economic data, continue to provide mixed messaging.
• Fed speakers remain stubborn that rates will continue to go higher to get to a level that is
  sufficiently restrictive. Of most note, St Louis Fed President Bullard presented analysis showing
  5-5.25% as the minimum level where rates might be ‘sufficiently restrictive.’
• Last week’s lower-than-expected CPI print drove the third largest easing in the GS US financial
  conditions index in its 30+ year history - on par with major policy announcements during the GFC
  and Covid crisis. The one-day move in USD, US rates and Stocks (particularly those factors down most during this tightening cycle) were some of the largest in history.
• China announced measures to help avert a property crisis, a signal that President Xi is turning his attention to rescuing the economy. Key elements include commercial banks extending maturing loans to developers, banks providing funding to ensure completion of pre-sold homes, lenders encouraged to negotiate repayment extensions with homebuyers.
• Rumours that a major Chinese cathode maker cut its output forecasts sent listed lithium
  producers plunging on Tuesday. Lithium carbonate futures on the Wuxi Stainless Steel Exchange
  dropped 7 per cent on speculation in China that a major cathode producer might have slashed
  production targets and some Chinese firms forecasting softening in the market later in 2023.

Macro / Economic newsflow:

• The Minutes of the RBA’s November policy meeting noted the Board increased the cash rate
  +25bp rather than +50bp because (i) the cash rate had already “increased materially”, (ii) there
  were lags to policy, (iii) the housing market was softening, and (iv) global supply-chain
  pressures/commodity had eased somewhat.
• The RBA did not rule out returning to larger increases if the situation warranted and is also
  prepared to keep rates unchanged while it assesses state of the economy and the inflation
  outlook. The Minutes acknowledged ongoing upside risks to inflation argued for a +50bp hike,
  but noted the Board valued “acting in a consistent manner”.
• Treasure Jim Chalmers said imposing an energy tax was not the priority with the government's
  first preference instead being a regulatory outcome. Following criticism by the energy industry
  over the potential for a super profits tax, Chalmers said the government did not want to
  threaten Australia's reliability as a global supplier of energy.
• Australia's Wage Price Index (ex. bonuses) +1.0% qoq in Q.3, a bit above +0.9% qoq consensus expectations. Largest quarterly increase since 2012, with annual rate +3.1% yoy. Private sector
  wages +3.1% yoy (+4.1% including bonuses), with public sector +2.4%, Almost 50% of privatesector workers recorded an increase in base pay in the quarter with an average increase of 4.3%.
• October's Labour Force Survey was stronger than expected, with employment +32.2k (consensus +15k) and Australia's unemployment rate falling -15bp to a new cycle low of 3.39%. The unemployment rate remains lowest in NSW (3.2%) and is below 4% in all states ex Tasmania.
• US Fed Governor Waller speaking in Sydney stressed there is still a long way to go before the Fed concludes its tightening cycle. He added that rates will keep going higher and stay high until
  inflation is closer to the Fed's 2% target. His comments echoed that of his Fed colleagues last
  week, fueling concern markets may have gone too far in pricing in a policy pivot next year.
• Annual inflation rate in the UK jumped to 11.1% in Oct-22 from 10.1% in Sep, higher than market
  forecasts of 10.7%. Highest inflation rate since Oct-81, with main upward pressure from housing
  and household services, namely gas +129% and electricity +66%. This is despite the Energy Price Guarantee, without which inflation would have risen to around 13.8%. Food +16% annual rise.

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

Domestic Sector Performance:

• Outperformers: Materials +1.8%, Information Technology +1.2%, Consumer Staples +0.5%
• Underperformers: REITs -1.9%, Energy -1.2%, Consumer Discretionary -1.2%, Communication
  Services -0.8%, Utilities -0.7%, Health Care -0.2%, Industrials -0.1%, Financials +0.0%.

Chart of interest:

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