Weekly financial market update - 12 December 2022

US markets tracked lower (S&P 500 -3.3%) as they continued to give back initial gains post Fed Chair Powell's recent comments, and ahead of this week's CPI number and FOMC meeting. Whilst it is still expected that the Fed will slow its pace of tightening to 50 b.p. this week, focus will be on the dot plot and associated commentary for implications with respect to terminal rates, and additional color re the 'higher for longer' messaging. The US 2YR-10YR yield curve inversion continues to talk to growing growth concerns, with this starting to be reflected in S&P 500 EPS revisions, albeit a +5.5% growth rate is certainly not yet reflective of a broad based contraction.

S&P/ASX 200 -1.2% for the week, with Resources (+1.0%) the only segment of the market to close higher, as commodity prices (ex oil) continue to rise on relation of Covid restrictions out of China. Hang Seng (+6.6%) and CSI 300 (+3.3%) rose on this thematic. No surprises from the RBA, with a further 0.25% rise (to 3.1%). Markets pricing peak cash rates of 3.6% by Aug-23, with most economists now also broadly in line with this.

Broader Market Moves

• S&P/ASX 200 -1.2% for week ended 9 December, MTD -1.0%, calendar 2022 YTD +1.2%
• S&P/ASX Resources +1.0% (CYTD +26.4%), S&P/ASX 200 Industrials -2.1% (CYTD -5.7%)
• S&P/ASX Small Ordinaries -2.7%, calendar YTD -16.6%
• S&P 500 -3.3%, MTD -3.5%, calendar YTD -16.2%. NASDAQ -4.0%, calendar YTD -29.1%
• S&P 500 Value -2.9% v S&P 500 Growth -3.8%. CYTD Value -4.4% v Growth -26.6%
• US 10 yr bonds +5 b.p. to 3.56% (CYTD +205 b.p.), Australia -10 b.p. to 3.29% (CYTD +162 b.p.)
• US 2 yr yield +5 b.p. at 4.34% (CYTD +362 b.p.), Australian 2 year bonds +4 b.p. at 3.04%
• Australian cash rate 3.10%, US Fed Funds 3.75-4.00% (next decision 14 Dec)
• USD Iron Ore +5.3%, Copper +1.8%, Zinc +5.9%, Nickel +10.0%, Thermal Coal +2.9%, Oil -11.1%
• Gold +0.1%, AUD +0.3% ($0.680), Bitcoin +0.2% to $17,035

Key Market Drivers:

• US markets lower, more than reversing prior week gains. Down 6 of last 7 sessions, continuing to retrace the gains post Fed Chair Powell’s most recent comments. US CPI data Tue (US time),
  Wed FOMC meeting looms large. Fed is expected to step down hiking pace to 50 b.p., but eyes
  will be on the ‘dot plot’ re terminal rate expectations, color on the ‘higher for longer’ messaging.
• Deepening US yield inversion 2Y v 10Y continues to reflect the Fed prioritisation of inflation over
  growth, and rising growth concerns despite likely slowdown in pace of further rate hikes.
• US earnings continue to be revised downward. Q.4 bottom-up consensus EPS estimate for the
  S&P 500 decreased by 5.6% from end Sep to end Nov, this greater than the typical 2-3% revision over the last 5-20 years. Bottom up calendar 2023 estimates were also revised down by 3.6% over the same period, still looking for +5.5% C.23 growth. This reduction in earnings estimates, and share price gains since this time, have seen the PE for the S&P 500 rise from ~15x to ~17x
• Hong Kong and Chinese markets stronger for the week (Hang Seng +6.6%, CSI 300 +3.3%) on
  continued positive newsflow surrounding a relaxation of Covid restrictions, and additional
  property sector support measures out of China. Overall strength despite a leaked report
  suggesting Beijing was considering setting a 2023 growth target of 5%, underwhelming
  expectations for a stronger recovery as restrictions ease and activity levels resume.
• Resources the only Australian sector higher over the week (S&P / ASX 200 Resources +1.0%) as commodity prices continue to rise solidly on China reopening / recovery newsflow. Base metals all stronger (Nickel +10%, Zinc +6%, Copper +2%), iron ore a further +5% to US$111/tonne. Despite China being the world’s largest crude importer, oil continues to swim against this tide on global demand concerns, declining a further -11% to US$71/barrel

Macro / Economic newsflow:

• The RBA increased the cash rate +25bp to 3.1%, in line with expectations (19/20 economists
  expected +25bp). The attending statement noted that inflation is still too high and reiterated
  that the Board "expects to increase interest rates further over the period ahead."
• Australian September quarter GDP rose +0.6% q/q, broadly in line with consensus of +0.7% q/q.
  Household consumption rose +1.1% q/q (+11.8% y/y). Compositionally, services consumption
  continued to recover firmly while goods consumption grew more modestly.
• In levels terms, household consumption is now +5.9% above Dec-2019 levels, with goods
  consumption +9.2% above and services +4.0% above. The household saving rate fell -140bp to
  6.9%, still somewhat above pre-pandemic levels of c.5%.
• Headline November US PPI rose by 0.3% m/m, faster than October's 0.2% m/m pace, which was
  also the consensus. Up 7.4% y/y, down from prior month's 8.0%. Core PPI up 0.4%, hotter than
  forecasts for a 0.2% rise and October 0.1% increase.
• December preliminary Michigan consumer sentiment up 2.3 points m/m to 59.1, beating
  consensus 57.0. One-year inflation expectations down 0.3pp to 4.6%, lowest since Sep-21,
  though 5-10Y inflation expectations unchanged at 3%.

Domestic Sector Performance:

• Outperforming Sectors (versus S&P/ASX 200): Materials +1.9%, Consumer Staples +0.0%
• Underperforming Sectors: Information Technology -4.7%, Energy -3.3%, Financials -2.6%,
  Industrials -2.0%, Communication Services -2.0%, Health Care -2.0%, Utilities -1.9%, Consumer
  Discretionary -1.8%, REITS -1.3%

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

Chart of interest:

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