Central bank pressure rises on weaker data
- A mixed week for equity markets as investors digested a plethora of economic data, bringing in an end to the financial year.
- Investors have pared back expectations for US rate increases this year with the futures market showing traders assigning a 52% probability that the Fed will raise interest rates by another 2% this year, down from a probability of 74% just 1 week ago. Investors are also increasing bets that the Fed will start cutting rates in mid-2023.
- In local stock news, Qantas shares fell after the airline said it expects to report a significant full-year loss. The airline is also cutting capacity, mostly from high frequency routes to better cope with high fuel prices, whilst announcing new international flight
- Suncorp said it is reviewing options for its banking business which could include a demerger or sale.
- Tassal Group shares rose strongly after the salmon farmer rejected a $1 billion takeover bid from a Canadian aquaculture firm.
- A volatile week for the oil price, rising strongly early in the week on additional Russian sanctions and a large fall in US oil inventories, before losing all its gains on weakening economic data and OPEC+ ratifying an oil production increase. OPEC+ chose to defer discussions on its next move for supply.
- The Australian population rose by 0.5% a year in the 4th quarter of 2021. Net overseas migration contributed to population growth in the quarter for the first time since the pandemic began but remains very low vs pre-pandemic levels. Net interstate migration showed rapid growth in QLD at the expense of NSW and VIC. Population growth needs to rise aggressively from here if we are to maintain healthy economic growth and keep a lid on inflation.
- Australian retail trade rose by a strong 0.9% in May and is up 10.4% over the year, though is expected to soften in the period ahead given rising inflation and interest Spending in May was particularly strong in department stores and eating & drinking out.
- Australian manufacturing data improved in June, marking the 25th month in which conditions in the sector strengthened.
- Job vacancies in Australia jumped to all-time highs in the 3 months to the end of May, indicating strength in the economy and a likely further increase in rates.
- US central bank chair Jerome Powell referred to his commitment to curbing inflation as “unconditional” (ie. credibility), with other central bank members calling for more rate hikes even as Democrats warned against sparking a recession (leading into US mid- term elections). Powell repeated that the bank was still hoping to achieve a soft
- Whilst the US labour market remains strong, we’ve seen the technology sector aggressively shrinking its workforce over the last few weeks (likely to continue) with US banks now joining the party by laying off workers from their home-lending businesses. A sign of things to come as wages growth gets out of hand.
- Data showed that US existing home sales fell for a 4th month in May to the lowest in 2 years, with sales falling in 3 of 4 US regions. US home price growth slowed slightly in April, rising at a slightly slower annualised pace in April vs US mortgage rates are now at the highest level in more than 13 years.
- The University of Michigan’s US consumer sentiment index dropped in June to its lowest ever recorded level, whilst the university also revised its May reading of inflation expectations over the next 5-10 years to 3.1%. This comes as a key manufacturing and services index fell to a 5-month low.
- US consumer’s short-term outlook for the US economy dropped sharply to its lowest point in nearly a decade. Consumer confidence also fell for the 2nd consecutive month as Americans continue to assess the impact of high prices and rising rates.
- UK consumer confidence dropped to a record low as surging prices, weaker real incomes (net of inflation), and disruption from strikes hit home.
- China’s economy showed some improvement in June as Covid restrictions were gradually eased, but that improvement comes off a very low base. Factory and services activity expanded after three straight months of contraction. The government announced that it is cutting in half the amount of time visitors will have to spend in quarantine on arrival.
- The Chinese central bank pledged to maintain a supportive monetary policy to aid the economy’s recovery from covid and lockdowns, whilst President Xi pledged to take more effective measures to achieve his country’s economic goals.
- Germany’s biggest utilities are working to revive their coal operations in a desperate bid to shore up base load energy before the colder months begin. Germany is also pushing for G7 nations to drop a commitment to halt the financing of overseas fossil fuels projects by the end of the year, in direct contrast to Europe’s green energy
- The G7 countries said they are moving toward an agreement on expanding sanctions on Russia by looking for a mechanism to cap the purchase price of Russian oil, effectively a buyers’ G7 countries also announced a ban on Russian gold imports. Russia is the world’s 5th largest holder of gold reserves.
- Finland and Sweden took a major step on their way to NATO membership after Turkey dropped its opposition to their bids, all but ensuring the military alliance’s expansion on Russia’s doorstep. The move does send a clear message to President Putin but may also embolden him. Time will tell.