Weekly financial market update - 1st of May 2023
Written and accurate as at: May 01, 2023 Current Stats & Facts
The US market experienced a late-week rally, spurred by better-than-expected results from large tech companies, with the S&P 500 climbing 0.9% and the NASDAQ increasing by 1.3%. However, the Australian S&P/ASX 200 slipped by 0.3%, impacted by a 1.5% decline in the resources sector as most commodity prices trended lower.
Domestic inflation data from the past week showed a continued deceleration from very elevated levels, making it likely that the Reserve Bank of Australia (RBA) will hold off on any changes during its meeting this Tuesday. The US Federal Reserve is also scheduled to meet, with a final 25 basis point rise widely anticipated. Commentary from each central bank will likely set the tone for near-term market sentiment, with the risk that interest rate expectations may be reset from levels that currently assume a rapid pivot to rate cuts, particularly in the US.
On Friday, the S&P 500 in the US increased by 0.8%, with S&P/ASX 200 futures indicating a 0.7% rise to commence the shortened week in Australia.
Key market drivers included strong price reactions to better-than-expected large tech results, which pushed the US market higher. The NASDAQ had fallen by around 33% in 2022 as bond yields rose sharply, but the 43 basis point reduction in US 10-year bond yields year-to-date provided solid recent valuation support. Market breadth remains very narrow, with the number of S&P 500 companies outperforming the index year-to-date at its lowest levels in over 20 years.
Domestic inflation data released during the week supported the RBA's decision to keep rates on hold when it meets this week, allowing more time to further assess the impact of tightening to date. Fixed interest markets now indicate a 100% probability of the RBA holding rates steady, up from 81% a week ago.
The US Federal Reserve also meets this week, with an 84% probability of a further 25 basis point rise. Futures markets assume this to be the last, with almost 50 basis points of subsequent cuts priced by the end of 2023, and over 100 basis points by this time next year. This continues to differ from the Fed’s ‘higher for longer’ messaging. Commentary associated with this week’s meeting is likely to be important for nearer-term market sentiment.
Commodity producers were the main drags on the ASX this week. The S&P/ASX 200 Resources Index fell by 1.5% (-2.3% for April), as iron producers extended their recent weakness. Iron ore futures slid to a five-month low. The energy sector dropped by 0.5% as the oil price further erased gains accrued following the surprise production cut announcement by OPEC+ in early April. Finally, the copper price fell by 2.8% and neared year-to-date lows amid concerns about the impact on metals demand of a slowing economy.
Major banks National Australia Bank (NAB) and ANZ both report their interim results this week, with Westpac (WBC) to follow on May 8th. The extent of any weakening in key performance drivers will be in focus. The consensus view is that while likely to report solid H1 revenue growth due to stronger net interest margins, the tailwinds from higher cash rates are now fading. There will be particular focus on commentary surrounding mortgage margin headwinds, deposit competition, and higher wholesale funding costs.
In macroeconomic news, headline domestic Q1 inflation was 1.4% quarter on quarter, slightly above expectations for 1.3% but still representing the lowest increase since Q4 2021 and well below the
1.9% recorded in Q4 2022. Year on year growth also slowed to 7.0% (7.8% for Q4 2022). Underlying inflation of 6.6% year on year was modestly below expected levels of 6.7%, although still clearly well above the 2-3% RBA target range.
Total private sector credit rose by 0.3% month on month in March, with the annual growth rate easing to 6.8%. Housing credit growth was stable at 0.3% month on month (5.5% year on year), but owner-occupier credit growth (0.3% month on month, 6.0% year on year) recorded its slowest pace since 2020.
US GDP rose by an annualised 1.1% in the first quarter, notably less than the median forecast for 1.9%. It was the weakest pace of expansion since Q2 2022. The slowdown was largely driven by an inventory drawdown, with a 3.7% annualised growth in consumer spending providing the main growth impetus.
The US core PCE price index, the Federal Reserve's preferred gauge to measure inflation, rose by 4.6% annually in March, easing from 4.7% in the previous month and matching the 13-month low from December 2022. However, this result overshot market expectations of 4.5%.
The official NBS Manufacturing Purchasing Manager Index (PMI) in China, measuring the performance of the manufacturing sector, unexpectedly fell to a four-month low of 49.2 in April from 51.9 in March. This missed market estimates of 51.4. This latest print also pointed to the first contraction in factory activity since last December, amid weaker global demand.
Major share price moves in the S&P/ASX 200 included Megaport, which surged 32.8% after reporting Q3 results and upgrading FY23 EBITDA guidance to $16-18 million and FY24 to $41-46 million. This is well ahead of consensus, largely driven by cost savings and repricing. Blackmores soared 20.9% after the board and major shareholder unanimously accepted a takeover bid at $95 per share from Kirin Holdings, representing a multiple of 21x FY23 EBITDA. Nanosonics increased by 10.3% after a broker upgraded its recommendation from Underperform to Buy.
On the downside, Imugene declined by 7.4%, continuing its broader downtrend, now down more than 55% from December 2022 levels and around 80% down from May 2021 highs. Invocare fell by 8.3% after private equity firm TPG withdrew its indicative cash proposal of $12.65 and did not submit a revised bid, as Invocare had refused access to full due diligence. Syrah Resources plummeted by 24.5% following below-estimate Q1 graphite production, with future production to be moderated to better match demand. Costs remain elevated, and the company is issuing a $150 million convertible note.