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Markets buoyed by change in Fed rhetoric

  • Local and global equity markets continued their recent run in positive territory with investors reading weaker economic data and a subtle change to Fed comments as implying the end of the rate hike cycle is nigh.
  • In local stock news, copper and gold miner Oz Minerals shares fell after the company trimmed its guidance, reflecting a softer start to the year due to weather, covid-related labour shortages, and damage to equipment at its Carrapateena mine in SA.

MARKETS

  • Flight Centre shares rose after the travel company said it had returned to profitability sooner than expected and made a healthy Q4 profit.
  • Rio Tinto announced it had made US$15.6 billion in underlying earnings in the half- year to 30 June, but that it would be cutting its dividend in half from last year as the trading environment had become more challenging.
  • The Aussie dollar has continued to rise against the US dollar, assisted by a reduction in risk-off market sentiment, higher export prices, and increasing rhetoric that the US Fed is closer to the end of its rate hike cycle.
  • The oil price rose this week, following a fairly significant downward trend, as Russia slowed the flow of gas into Europe and US inventories fell with continued strong demand.

ECONOMICS

  • The headline annual inflation rate in Australian rose to 1% in Q2 from 5.1% in Q1 but came in below expectations for 6.2% print. The Q2 number was the highest since Q2 2001, with an acceleration in food prices and further rises in the cost of both fuel and building costs. Prices of food rose the most since Q3 2011. The RBA’s preferred trimmed mean measure rose 4.9%.
  • Retail sales in Australia rose by 0.2% in June to another record level, after a downwardly revised 0.7% growth in May and expectations of 0.5% increase. The June figure was the softest rise in retail trade since a decline in December 2021, with cost-of- living pressures and concerns regarding the RBA rate path hitting home.
  • Q2 Australian trade price data showed that goods export prices rose by a strong 10.1%, down from a 14.6% rise in Q1, with commodity prices leading the charge. Prices also rose for goods imports, up 3% in the quarter, owing to higher oil prices and wider refinery margins. These moves will help boost terms of trade, contributing to economic growth and smaller than expected budget deficit.
  • The new federal Labor government has released their economic forecasts predicting headline inflation to peak at 35% and with the economy growing 3% in FY2023 and 2% in FY24, a cut of 0.5% from both versus the previous government’s estimates. They also expect unemployment to rise to 3.75% by middle of 2023 and to 4% by mid-2024, with higher wage growth still to come.

  • The US central bank increased rates by 75% at their July meeting to 2.50%, largely as expected. The fourth consecutive rate hike means borrowing costs are now at their highest level since 2019. Chair Powell did his best to talk up the economy whilst also indicating that they’re prepared to adjust the stance of rate increases if risks emerge.
  • The US entered the long-held technical definition of a recession with their second consecutive quarter of negative economic growth, with Q2 growth coming in well below The Q2 result was always going to be weak given the White House and the US Treasury had spent the better half of a week trying to talk themselves around the technical definition of a recession. Technical recession yes, actual recession not yet.
  • US durable goods orders surged 1.9% in June, up from 0.8% in May, and against forecasts for a 4% decline. The better than expected numbers were due to increases in new car and truck orders and a spike in orders for fighter jets and other military planes. Excluding those two areas, new orders were up 0.3-0.4%.
  • US pending home sales fell 20% on the same time last year in June, down from a minus 13.8% in May. Expectations were for a 9% decline. Excluding the first 2 months of covid, this is the slowest pace of existing home sales since September 2011. 30-year fixed mortgage rates going from circa 2% to 6% will do that.
  • The well-known but often inaccurate IMF has again downgraded its world economic growth forecasts to 2% this year and 2.9% next year, downgrades of 0.4% and 0.7% respectively.
  • German consumer sentiment plunged to an all-time low, with concerns rising regarding sufficient gas supplies for businesses and households next winter. This is on top of the existing concerns about disrupted supply chains, war in Ukraine, and soaring energy and food The last low in consumer sentiment was during Covid and sentiment was significantly higher in the GFC than it is now.

POLITICS

  • Italy will hold an early election on 25 September, following the resignation of Prime Minister Mario Draghi which trigged the dissolvement of the ruling coalition and parliament. The centre-right coalition is currently leading in the polls.
  • Russia and Ukraine signed a deal to reopen Ukraine’s Black Sea ports for grain exports, raising hopes that an international food shortage can be Russia then attacked the sea port of Odesa just hours after signing the deal.
  • Russia continued to slow the flow of piped gas to Germany, putting ongoing pressure on Europe to either cede to Russia’s demands or to ramp its energy stockpiles before the European winter The Nord Stream pipeline was reduced to 20% of its capacity due to “maintenance issues with a turbine”.