Weekly financial market update - 13th of March 2023

The markets were lower across the week due to hawkish comments from the US Fed Reserve Chair, who suggested that the pace of tightening could be stepped up if stronger data persists. This overwhelmed the local RBA, which appears closer to pausing rate hikes in Australia. The consensus is now for a 50 b.p. hike in the US in March, but by the end of the week, yields were lower in both the US and Australia. The collapse of tech lender Silicon Valley Bank also contributed to the lower yields and heightened focus on bank balance sheets and potential unrealised losses on rate-sensitive securities such as bonds.

The RBA hiked the cash rate by 25 b.p. to 3.60% as expected but surprised the market with a dovish-leaning statement, suggesting that it may pause rate hikes to assess the state of the economy. Terminal rate expectations have been lowered to below 4.0% in response. The RBA will assess monthly employment data, monthly CPI, business surveys, and retail sales figures before April's meeting.

The S&P 500 in the US was down 4.5% for the week, wiping out the majority of YTD gains. The NASDAQ was down 4.7%, and the S&P/ASX 200 was down 1.2%. Resources were down 4.2%, and industrials were up 0.1% for the week. The soft Friday in the US has the S&P/ASX 200 futures suggesting a 0.6% open to the week.

The key market drivers included the equity markets being lower due to more hawkish comments from the US Federal Reserve Chair, the collapse of Silicon Valley Bank, and the RBA's surprising dovish-leaning statement. The macro/economic newsflow included the RBA's decision to hike the cash rate by 25 b.p., the easing of Australia's trade surplus, and the February US nonfarm jobs headline print being higher than expected.

KEY MARKET DRIVERS

Equity markets were lower throughout the week due to the US Federal Reserve Chair's hawkish comments and the potential for an increase in the pace of tightening. Markets quickly factored in a ~70% chance of a 50 b.p. rate rise at the March meeting, taking implied terminal US rates to ~5.6%. In response to labour market data and recession and financial system concerns, peak rate expectations moderated to ~5.3%. The deeply inverted US 2-year/10-year curve, which peaked at 108 b.p. earlier in the week, continues to send strong recessionary signals.

• US tech lender Silicon Valley Bank collapsed on Friday, revealing US$1.8b of realised losses on the sale of a US$21b bond portfolio to fund declining customer deposits. The collapse of Silicon Valley Bank raised concerns about bank balance sheets and the potential for unrealised losses on rate-sensitive securities, contributing to lower equity markets.
• The RBA hiked the cash rate by 25 b.p. to 3.60% as expected, but the accompanying dovish-leaning statement caught markets off-guard. RBA Governor Lowe confirmed that it may be appropriate to pause rate hikes to assess the state of the economy.
• The RBA's language around the low risk of a price-wages spiral and the preparedness to reduce inflation slowly had an incrementally dovish tone relative to the February commentary.
• There are differences between the US and Australia, including a lower rate of inflation in Australia and the sensitivity of indebted households to rate hikes due to the higher proportion of variable-rate mortgages. The RBA noted that total scheduled mortgage payments are expected to reach a near-record 9.5% of disposable income later this year.

MACRO/ECONOMIC NEWSFLOW

• RBA Governor Lowe flagged a potential pause in rate hikes, citing the lagged effects of previous tightening, the impact on households, and the fact that policy is now in the restrictive territory.
• Governor Lowe provided more specific details on the near-term outlook for rates during Q&A, noting that the Board would assess monthly employment data, monthly CPI, business surveys, and retail sales figures before April's meeting.
• The RBA's March statement was more dovish than February's statement because recent domestic data on GDP, wages, and unemployment were somewhat softer than expected, according to Governor Lowe.
• SEEK job ads fell 1.6% in February following a 2.9% rise in the prior month, but they remain 37% above pre-pandemic levels despite being 20% below their May 2022 peak.
• February's US nonfarm jobs headline print of 311k was higher than the 215k consensus, and annualised average earnings growth was 4.6% (below the 4.7% consensus for January and 4.4% in January), lessening fears of the labour market overheating.
• Australia's trade surplus eased to $11.7 billion in January, slightly below the consensus of $12.5 billion, with import values rising 4.6% m-o-m driven by a rebound in consumer and capital goods imports, offsetting a 1.4% rise in export earnings due to a rebound in iron ore export value.

MAJOR SHARE PRICE MOVES

• Invocare: +37.8%. Received an unsolicited, non-binding, indicative offer from US PE firm TPG Global to acquire IVC at $12.65, a +41% premium to the previous closing price.
• Xero: +14.7%. Announced a cost reduction program that would see F.24 opex at 75% of revenue (F.23 was 80-85%). The market responded positively to this increased focus on profitability.
• Nanosonics: +10.3%. Received a broker upgrade with a positive focus on the potential sales leverage and margin expansion from its new Coris endoscope-cleaning product.
• ALS Limited: -10.1%. CEO resigned from the company, citing family reasons and effective immediately, only a matter of weeks before the end of the financial year.
• Sandfire Resources: -10.4%. No material newsflow. Guidance for F.23 of 83-91kt copper and 78-83kt zinc was retained, with an F.25 target of 110-120kt copper and 80-100kt zinc highlighting growth.
• Megaport: -12.7%. The unexpected resignation of the CEO, effective immediately, creating additional uncertainty at a time where macro environment has moderated momentum.

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