Markets
Equity markets were mixed this week with US Tech and Asia up, Europe down, and Australia near flat.
In local stock news, AGL ended its plans to spin off its coal-fired power plant business whilst also announcing it would replace its chair, CEO, and other members of its board. The company plans to report back to shareholders in September with a new plan.
Baby formula stocks were up as the US government signed an agreement with an Australian company following a baby formula shortage which has dragged on way too long and has seen US parents driving across state lines to secure baby formula for their babies.
Insurers Suncorp and IAG fell sharply this week after a note by Morgan Stanley warned that both companies face “catastrophic structural” risks from climate change. Interesting take on an almost mandatory insurance market here in Australia with effectively a duopoly market structure.
Origin Energy shares fell sharply after the company withdrew guidance for fiscal year 2023, saying coalminers had been unable to supply their Eraring Power Station with enough coal to operate normally. Eraring is Australia’s biggest power station.
A volatile week in oil prices with low US inventories and an EU ban on Russian oil delivered by sea pushing the price higher. Downward price pressure was provided via a report which explored the idea of suspending Russia’s participation in OPEC+ with some members beginning to prepare for an output increase sometime in the next few months.
Economic
Australian retail trade rose by 0.9% in April and sits 9.6% higher over the year. Strong spending on eating and drinking out and on clothing was somewhat offset by falls in household goods. All states recorded gains except for NSW. Consumer spending numbers are currently at odds with falls in consumer sentiment.
Australia’s current account surplus narrowed in the 1st quarter whilst net exports will take some of the shine off economic growth in the same period, with export volumes falling and import volumes rising. Australian company profits rose by 4.7% in the quarter whilst wages and salaries rose by 1.8% in the same period.
Building approvals fell by 2.4% in April, driven by a 6.1% decrease in private sector multi-unit dwellings, with the falls somewhat offset by a slight rise in private sector houses. Private sector credit growth also rose in April, driven by strong growth in business credit.
Australian dwelling prices fell by 0.3% in May across the 8 capital cities, the first monthly fall since September 2020. Falls in Sydney, Melbourne, and the ACT were only partially offset by rises in Adelaide, Brisbane, and Perth. Annual growth now sits at 11.7%. CBA are expecting a flat 2022 with 8-10% falls in 2023. All depends on how eager the RBA gets on rates.
Australian economic growth rose by 0.8% in the 1st quarter to be up 3.3% on same time last year, with household consumption, business investment, and public demand rising strongly. Declines in dwelling investment and net exports were a drag on growth.
US core inflation, the US central bank’s preferred measure, rose 0.3% in April which was in line with expectations. The monthly move saw the annual core rate slow to 4.9%. US inflation looks to have peaked. Now it’s a question of how slow or fast it falls.
Gauges of future inflation have begun to plateau whilst JP Morgan Chase economists have said that global inflation will peak at an annual rate of 8.6% this quarter with a substantial drop in global inflation to a 3.25% average pace in the 2nd half of 2022.
US job openings fell to 11.4 million from an upwardly revised 11.9 million in March. Either way, it’s a big number. However, private businesses only hired 128,000 workers in May, the least since the job losses in 2020, and well below forecasts of 300,000. Economic uncertainty along with workers pricing themselves out of the market.
German inflation hit another all-time high driven by soaring energy and food costs, with consumer prices jumping to 8.7% from a year ago, versus predictions of an 8.1% increase. European central bank officials are rumoured to be finalising an end of quantitative easing (money printing) shortly and a potential rate rise in July, with the market currently pricing in a cash rate above 1% by year end.
A key Chinese manufacturing data point increased in May, coming in above market forecasts, but still showed manufacturing contracting for the 3rd straight month.
Politics
The federal Australian Labor party has formed a majority government as continued vote counting saw them eclipse the 76 seats needed. In opposition news, both the Liberals and the Nationals have new leaders and deputy leaders following internal party voting.
The US secretary of state said the US will seek to influence China’s behaviour by shaping the world around Beijing. He went on to say that the current Chinese Communist Party has become more repressive at home and more aggressive abroad under President Xi.
Russian President Vladimir Putin said he’s willing to facilitate grain and fertilizer exports as global concerns mount regarding food shortages and rising prices, but only if sanctions on his country are lifted. It’s a game of which side can absorb more pain. Problem is people globally are suffering already.
A record volume of Russian oil is aboard tankers, with enormous amounts heading to India and China (albeit at a steep discount to market prices) as other nations restrict imports because of the war in Ukraine. EU leaders have agreed to ban Russian oil delivered by sea, but pipeline oil will continue to flow. Asia has overtaken Europe as the largest buyer of Russian oil last month and that gap will likely widen going forward.
The top of China’s Communist Party are playing good cop / bad cop with President Xi urging the nation to stick with strict covid-zero policies whilst Premier Li tells officials to bolster the economy and hit growth targets, warning of the dire consequences of inaction. A range of announcements followed including an all-out infrastructure push. Going to be an interesting 2nd half to the year for China.
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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