Weekly financial update - 13th of February 2023

Markets pulled back last week, with strong US job numbers at the end of the prior week and more hawkish comments from US Fed officials resulting in the market dialling up terminal rate expectations. The 2Y/10Y curve reached its most inverted position in more than 40 years, denting confidence in the ability of the US economy to withstand additional rate hikes.

Closer to home, the RBA raised by 25 b.p. to 3.35% as widely expected; however, the commentary and SoMP released at the end of the week solidified that further rate hikes (i.e. plural) should be expected. The path to return to the 2-3% targeted inflation appears likely slower than expected (just under the top end by mid-2025), with wage growth clearly an area of focus/risk. Financial markets are again pricing peak cash rates of 4.1% (3.7% a week prior).

The S&P 500 was -1.1% for the week (+6.7% YTD), with the NASDAQ -2.4% (+12.1% YTD), reflecting a 23 b.p. rise on bond yields and some results which missed expectations. The S&P/ASX 200 was -1.6% (YTD +5.6%), with Resources (-0.5%) outperforming Industrials (-2.1%). The S&P 500 was +0.2% on Friday, with our futures market suggesting a flat open to the week.

KEY MARKET DRIVERS

• Following a downshift in yields during January as markets latched onto emerging signs of disinflation, strong US jobs data and comments from several Fed representatives saw markets dial-up Fed terminal rate expectations to 5.2% (4.9% a week ago) and wind back nearer term cuts.
• The US's 2Y/10Y bond spread moved to its most inverted position in more than 40 years, as confidence in the US economy’s ability to withstand additional interest rate hikes again ebbed rather than flowed.
• Popular narratives surrounding a rapid deceleration in inflation, US soft landing, Europe avoiding an energy crisis and China's accelerated reopening seem to have become consensus views, quickly priced in by markets. The potential for any disruption to this narrative has been reflected in recent market volatility.
• 25 b.p. rate rise by the RBA was as expected. Governor’s Statement and subsequent SoMP solidify that we are not yet at the end of the current tightening cycle. There was a clearer emphasis on returning inflation to target (not expected until mid-2025). Higher inflation and a tight labour market raise the prospect of higher terminal rates, and the futures market now forecasts a peak cash rate of 4.1%, up from 3.7% a week ago.
• 69% of US S&P 500 companies have now reported Q.4 results. Blended earnings decline for Q.4 is currently -4.9%. This compares to an estimate of -3.1% at the end of Dec-22. This will likely mark the first y-o-y decrease in earnings since Q.3 2020 (-5.7%). Calendar 2023 EPS estimates have been lowered by -3.0% since 31 Dec-22 and currently assume +2.5% growth.

MACRO / ECONOMIC NEWSFLOW

• The February Statement on Monetary Policy (SoMP) saw unchanged forecasts for 1.5% GDP growth in each of 2023 and 2024, and the unemployment forecast was unchanged at 3.75% by the end of 2023 before rising to 4.5% by June 2025. Wages growth is expected to peak at 4.25% late in C.2023.
• In trimmed mean terms, the RBA now expects a slower deceleration in inflation to a 4.3% y-o-y pace by Dec-2023 (prior: 3.8%), with inflation persisting above the RBA’s 2-3% band until mid-2025.
• The SoMP noted the importance of wage growth to the inflation outlook (and rate settings), and uncertainty surrounding household spending (some households with available buffers, others requiring spending cuts).
• As for why the RBA turned more hawkish, the Q4 CPI led to a reassessment of domestic inflation and labour cost pressures. This was supported by the RBA’s business liaison with firms noting “labour cost pressures generally increased as wages growth picked up over the December quarter”. In addition, “firms for which labour is a large share of their costs, such as tourism and hospitality businesses, continue to pass through higher wages to their prices”.
• The RBA Statement contained the following hawkish observation; “High inflation makes life difficult for people and damages the functioning of the economy. And if inflation were to become entrenched in people’s expectations, it would be very costly to reduce later”. This suggests a firm tightening bias is maintained.
• UBS have become more bearish on housing, reflecting the impact of higher rates upon borrowing capacity, which will see home loan values fall by 40-50% peak to trough, flowing through to 17-20% price falls.
• Australia's trade surplus eased to A$12.2bn in December (A$13.5bn in November), broadly in line with expectations. Export earnings fell 1.4% (A$0.8bn) with key resource export categories all lower (LNG 5.6% or -A$0.5bn; Iron Ore -3.0% or -A$0.5bn; and Coal -1.8% or -A$0.2bn). Import values rose slightly (+1.0%)

MAJOR SHARE PRICE MOVES - S&P/ASX 200

• Newcrest Mining +10.2% Received a conditional and non-binding indicative takeover proposal from Newmont (0.38 Newmont shares for each NCM), a then 21% premium to prior last close
• Medibank Private +5.8% Post approval by the Health Minister MPL announced a better than expected 2.96% premium rise, deferred for 2 months (cost of $59m) as claims continue to track below pre Covid levels
• Suncorp Group +4.0% Delivered against expectations for H.1 and maintained FY guidance despite the challenges from severe loss events, and inflationary pressures on claims, with strong price rises to date
• Credit Corp -12.5% Gave up last week’s gains as market digested a half year result which missed some analyst expectations, and with a shift in growth drivers seeing some reassess the valuation multiple
• Novonix -13.1% Continues downtrend. Press article focusing on downward revisions to production schedule, inferring that this in part reflects an inability to secure additional customers
• Healius -13.4% Adjusted EBIT will be $40m, well below consensus.  Covid revenue was down 88% in the period, business as usual revenue +2.7%. Significant cost out program announced.

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