Markets
Local and global equity markets were mixed this week as investors tried to make sense of very mixed economic data.
In local stock news, OZ Minerals shares soared following a $8.4 billion takeover approach from BHP. OZ’s board rejected the $25 per share bid. BHP has cash to burn and there’s plenty of synergies between the two companies. The market thinks BHP will be back with a higher bid.
Aurizon Holdings shares fell after the rail freight operator announced that its full year earnings had dropped 1% to $1.47 billion. Weather and covid disruptions countered the rise in revenue from Aurizon’s freight contracts, which are inflation-linked.
Suncorp shares fell after the insurer said its full-year net profit after tax fell 36.7% to $681 million, missing expectations. Weather events were the main contributor to the fall with thirty-five major natural hazard events and about 130,000 claims in Australia and NZ.
National Australia Bank reported a $1.8 billion cash profit for the third quarter, an increase of 6% on the same period last year. Cash earnings increased by 3% with continued lending and deposit momentum, up 2% and 4% respectively. However, the company warned full-year costs were expected to grow by 3-4% with the bank citing higher personnel and leave costs.
CBA posted a full-year cash net profit after tax of $9.6 billion, 11% higher than in the previous financial year. Business and household deposits were up strongly, as was business lending and home lending (to a lesser extent). Operating expenses were lower.
REA Group (realestate.com) shares rose to a four-month high after the company announced full-year net profit after tax had risen 25% to $408 million. The company acknowledged that the residential property market was moderating but that strong economic conditions would continue to support demand.
In other stock news, Computershare shares fell after the company announced full-year earnings that included a loss in its mortgage services business, IAG shares fell after the insurance company said it would be increasing its natural peril allowance, and A2 Milk shares fell after the US FDA delayed action on it and other infant formula makers’ requests to import formula into the US.
The Aussie dollar rose against the US dollar as the lower-than-expected US inflation print could mean a less aggressive Fed ahead.
The oil price rose this week as the International Energy Agency sees high demand whilst OPEC has cut its 2022 forecast for growth which might means lower supply ahead.
Economic
Australian consumer sentiment fell again in August and is now down in deeply pessimistic territory, with nine consecutive monthly falls. Most components fell sharply, with the one bright spot being the outlook for the labour market with unemployment expectations falling.
Australian business confidence and conditions surprisingly both rose in July to be back above long-term averages. All components of business conditions were strongly positive. The spread between business confidence and consumer sentiment is the largest in the history of the series.
The US economy added a huge 528,000 jobs in July, much better than market forecasts of 250,000 and above the upwardly revised 398,000 in June, with unemployment falling to 3.5%. The biggest gains came from leisure & hospitality, professional & business services, and healthcare. Private sector employment is higher than pre-covid whilst government employment is lower.
The annual inflation rate in the US slowed more than expected to 8.5% in July, below the 40-year high of 9.1% hit in June and below market forecasts of 8.7%. The headline July reading was 0% month on month. The annual core inflation rate now stands at a 6-month low of 5.9%, below market expectations.
US producer price inflation for July came in at minus 0.50%, well below expectations for 0.20% gain, the first negative monthly reading since July 2020. This together with the weak inflation print could lead to smaller rate rises ahead.
US average hourly earnings rose in July following an upwardly revised gain in June and above market estimates. Over the past 12 months, average hourly earnings have increased by 5.2%, the same pace as in June, and above market forecasts.
US unit labour costs in the business sector surged by 10.8% in Q2, above market forecasts of 9.5% jump and an upwardly revised 12.7% gain the previous quarter. The Q2 number reflects a 5.7% increase in hourly compensation and a 4.6% decrease in productivity. More simply, higher pay for less output means likely job losses ahead.
The Reserve Bank of India lifted rates by 0.50% to 5.4%, with 1.40% of rate rises since May 2022. They have retained their real economic growth forecast for FY23 at 7.2% with inflation projected at 6.7%, above their upper tolerance level of 6%. However, a key services sector reading hit a four-month low whilst the trade deficit continued to rise.
China’s consumer and producer price indicators for July came in below expectations, with covid-zero policies still taking their toll. The consumer price index rose to 2.7% (below the government’s 3% target) whilst the producer price index fell to 4.2%.
Politics
EU diplomats have said that the US and Iran remain far apart on negotiations to revive the 2015 nuclear agreement and the chasm between the two seems to be widening.
The US Senate passed a tax, climate, and health care bill in a slimmed down version of President Biden’s domestic agenda, with quite disparate areas of the economy lumped into the one bill. The bill has been called the “Inflation Reduction Act”, but US congressional budget offices have confirmed there doesn’t appear to be much in the way of likely inflation reduction, whilst there does appear to be tax increases. Not a good combination right now.
US House Speaker Nancy Pelosi’s trip through Asia, with a controversial stop-off in Taiwan, resulted in the Chinese conducting “military exercises” designed to show an ability to encircle the island and more simply a show of strength. Not a good look for either country. Tensions and concerns throughout Asia rose and remain high.
Weekly market updates are written by Chris Lioutas. Chris is on the board of Peer Wealth X Futuro Investment Committee. View LinkedIn
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