Weekly market update - 18th of July 2023
Written and accurate as at: Jul 18, 2023 Current Stats & Facts
PRIMARY MARKET INFLUENCERS
- The US market gave a lukewarm response to lower than predicted US headline and core inflation rates during the week. This increase in inflation, running at an annualised rate of 3.0% (core inflation at 4.8%) with a moderate unemployment rate of 3.6%, raises the possibility of the Fed halting interest rate hikes. This sentiment was further backed by softer-than-expected US PPI data, suggesting a cooling US economy.
- The caveat, however, lies in the probable wage growth in such a constricted labour market. It appears incompatible with inflation consistently falling within the 2-3% target. This could call for further intervention by the Fed on interest rates, hence increasing the likelihood of a significant slowdown in activity and growth.
- Having learnt a bitter lesson about future predictions, RBA Governor Lowe maintained a cautious stance during the week. This left the market speculating about another potential rate hike in August, following the quarterly CPI numbers and the August SOMP forecast update. While some economists anticipate an earlier peak, fixed interest markets persist in pricing in an additional two hikes of 25 b.p. by December 2023.
- The sentiment in China's market has significantly improved after the government concluded its multi-year crackdown on the tech sector and shifted to a more policy-friendly approach. Despite China's trade data indicating a steeper-than-anticipated contraction in exports and imports, the market seems to anticipate potential policy responses at the forthcoming July Politburo meeting.
MACRO / ECONOMIC NEWS
- The US CPI headline of 0.2% m-o-m fell short of the 0.3% consensus, slightly up from last month's 0.1%. The annualised CPI of 3.0% was also lower than the estimated 3.1% and is the weakest since March 2021. The core CPI (ex-food and energy) of 0.2% was also below the consensus of 0.3% (May 0.4%). The annualised core at 4.8% is the lowest since October 2021.
- In July, the Westpac-MI consumer sentiment index marginally rose above pandemic lows (+2.7% m-o-m) but remains 20% below long-term averages. Westpac noted the RBA's decision to hold this month had a minimal impact on confidence, with consumers still cautious about the possibility of more rate hikes. Consumers' outlook on their family finances remains bleak. However, perceptions around the housing market have improved.
- The NAB business confidence index increased in June while conditions remained stable above their long-run average. Activity measures showed strong profit growth while employment was steady, and sales remained robust. However, lead indicators softened with forward orders turning negative and capacity utilisation dropping to its lowest since early 2022.
- Governor Lowe acknowledged the many 'cross-currents affecting the inflation outlook'. He mentioned persistent pricing pressures due to several factors, including high capacity utilisation, robust growth in unit labour costs, a significant rent increase, and higher electricity prices. However, a few factors are contributing to inflation easing, including the alleviation of COVID supply chain disruptions, decreasing commodity prices, and slower household consumption growth.
- Dwelling commencements in 1Q 2023 rose by 14.0% q-o-q to 186k annualised, the highest level since 1Q 2022. The year-on-year figure improved but is still at -6.6%. The total pipeline of residential Work Yet to Be Done is close to record levels at $60.2b, which equates to 2.4% of annual GDP.
- The US Producer Price Index for final demand increased by 0.1% from a year earlier (0.4% expected), the smallest rise since 2020. The year-on-year core reading fell to 2.4% from 2.6%, representing only a 1.0% annualised rate in Q.2.
SIGNIFICANT SHARE PRICE MOVEMENTS – S&P/ASX 200
- Megaport Ltd surged by 40.5% after revising its EBITDA guidance by 18% upwards due to faster-than-anticipated cost savings and lower customer attrition. Capricorn Metals Ltd also showed steady strength throughout the week, rising by 18.4% after Q4 production at Karlawinda met guidance but cash accumulation surpassed expectations. Evolution Mining Ltd went up by 17.1% with no specific company news, but it was one of several gold stocks to trend higher late in the week as the gold price spike
- In contrast, NIB Holdings Ltd, a recent outperformer, fell by 2.8% with no particular news, drifting as investors sought exposure to a risk rally. QBE Insurance Group gave up some ground, down 3.6%, given its strong outperformance this year has been partially driven by leverage to rising rates. Medibank Private Ltd fell by 4.0% despite two price target upgrades by brokers, struggling to keep up with the broader market given its defensive, low-beta characteristics.