Weekly financial market update - 6th of March 2023

Some relief for markets this week, despite yields continuing to edge higher. No change to the broader narrative that central banks have further work to do on rates, however little incremental newsflow to add fuel to the argument.

The resource sector ran hard during the week (S&P/ASX 200 Resources +5.1%) ahead of the Chinese National People’s Congress, where expectations rose that a 6% economic growth target would be announced for 2023. Over the weekend, a target of 'around 5%' was in fact announced, which may see some retracement of these most recent gains.

Both Q.4 GDP growth (+0.5% q-o-q against a +0.8% expectation) and January monthly CPI (year-on-year rise +7.4% versus +8.0% expected) came in below expectations. This is likely to be welcomed by the RBA as it seeks a moderating level of demand. However, it is likely to require evidence of a more sustained moderation in inflation and growth, and remains set to raise cash rates by a further +0.25% to 3.60% this Tuesday.

The S&P 500 in the US was +2.0% for the week (+5.7% YTD), including a +1.6% move on Friday night our time. The NASDAQ was +2.6% (+11.9% YTD). The S&P/ASX 200 was flat for the week, with YTD gains +4.2%). Resources were +5.1% whilst Industrials were -2.0% (including Banks -3.3%). S&P/ASX 200 futures suggest a +0.9% open to the week.

KEY MARKET DRIVERS

• Some relief for markets this week after three successive weeks of decline. No change to the more recent softer narrative, just little incremental newsflow to further fuel it. Yields continued to press higher as economic data keeps upward pressure on rates. Combined with net earnings downgrades, this upward shift in yields is placing downward pressure on valuation multiples.
• The RBA is expected to raise the cash rate by 25 b.p. to 3.60% at Tuesday's policy meeting. While this week's softer Australian GDP and CPI data provide some relief to an RBA looking to moderate aggregate demand, the central bank is still expected to reiterate its priority in returning inflation to target and maintain a view that further rate increases will be needed in the months ahead.
• A deceleration in headline January CPI supports a view that inflation peaked in late 2022. However, limited conclusions were drawn from the data given several CPI items are absent in the monthly series and the RBA likely needs to see evidence of a sustained moderation. While goods inflation is easing, a concern remains that services inflation will prove stickier, with the jobs market tight and rents pushing higher.
• With respect to the unexpected slowdown in Q4 GDP growth, the softness in household consumption and rapid drop in savings ratio points to more moderation in domestic demand. However, wage pressures are yet to abate with the cost of labour accelerating further.
• Resources strongly outperformed this week (ASX200 Resources +5.1%), with 13 of the top 15 ASX 200 stocks resource related. This strength related to hopes the Chinese National People’s Congress would announce a 6% GDP growth target for 2023. This compares to a 5.5% target announced last year (actual growth 3% impacted by Covid). Over the weekend, a target of ‘around 5%’ was in fact outlined. It awaits to be seen whether this will see some ‘buy the rumour, sell the fact’, and some retracement of recent strength.

MACRO / ECONOMIC NEWSFLOW

• Q4 GDP growth slowed to +0.5% q-o-q vs consensus expectations of +0.8%. Annual growth decelerated to +2.7%, in line with the RBA’s forecast in February’s SoMP. Household consumption rose +0.3% q-o-q (+5.4% y-o-y), however signs of a shift from goods to services, and also spending increasingly funded by a continued drop in the household savings ratio, which fell -270b.p. to 4.5% (around pre-pandemic levels).
• January monthly CPI indicator (covering ~two-thirds of the quarterly CPI) was weaker than expected, falling by 0.4% m-o-m. The year-on-year growth was 7.4% (consensus 8.0%), down sharply from 8.4% in Dec-22.
• Whilst implying that monthly inflation may have peaked, economists (and the RBA) treat this volatile monthly data series with some caution, given it does not fully capture all items in the quarterly CPI basket.
• Private sector credit was up +0.4% in January m-o-m, with annual growth +8.0% (was +8.3% in the prior month), the third consecutive monthly slowdown. Housing credit growth was stable at +0.3% m-o-m, with the +6.1% annual rate of growth decelerating to its slowest pace since July 2021.
• Nominal retail sales rebounded +1.9% m-o-m in January (consensus +1.5%), partially retracing the -4.0% decline in December. Year on year +7.5%. Ex-food, sales rose +2.9% m-o-m (+9.5% y-o-y) following a - 6.6% m-o-m decline in December. In levels terms, sales remain below the November 2022 peak.
• Australian capital-city dwelling prices fell -0.1% m-o-m in February, the smallest monthly decline since prices started falling in May 2022. In levels terms, capital-city dwelling prices now -9.7% below their April 2022 peak. Annual growth in advertised rents has stabilised at 9.5% over the past four months

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