Local and global equity markets mostly continued their trend higher this week with some weakness in Asia during the week due to rising political tensions between China and the US.
In local stock news, A2 Milk shares rose to a 3-month high on reports that it could soon gain approval to sell infant formula into the US. A2 said it had an application pending but no indication on the timing.
The oil price fell sharply this week, continuing falls since early June, as concerns continue to mount regarding demand worries.
The RBA increased the cash rate by 0.50% to 1.85% at their August meeting as widely expected. The statement included new elements which some took as an indicator that the Board is getting closer to slowing or even pausing their tightening cycle. The RBA now expects inflation to peak at 7.75% this year whilst falling to a little above 4% and around 3% in 2023 and 2024 respectively.
Australian private sector credit growth was strong again in June, up 0.9% in the month and 9.1% over the year. Business credit was the strongest contributor up 1.5% in the month and 13.2% over the year. Housing credit was up by the same amount last month to be up 7.8% over the year but is expected to moderate from here. Personal credit growth is lower over the year and remains significantly lower than pre-covid.
Australian building approvals fell by 0.7% in June, a smaller fall than consensus, and sit 17.2% lower over the year. Approvals for private houses rose by 1.2% while private apartment approvals fell by 5.7%. Over the past year, SA, NSW, and VIC have recorded the largest falls with QLD and WA holding up better, largely reflecting interstate migration patterns.
New house lending fell by 4.4% in June, coming in below consensus, driven by a sharp fall in investor lending. Lending in all categories fell, with investors and first home buyers the largest contributors to the falls. The share of lending at fixed rates continues to fall. Refinancing for owner occupiers rose strongly in June, with lenders offering significantly lower rates than advertised to compete for borrowers.
Australian retail trade volumes rose by 1.4% in the 2nd quarter, slightly stronger than expectations, driven by spending at cafes and restaurants, clothing, and spending at department stores. In contrast, food retailing and household goods spending fell in the quarter. QLD and TAS saw the largest increases.
The Australian trade surplus printed at a new record high of $17.67 billion, up from just over $15 billion in May. Total exports rose by 5.1% led by rural goods and gold, with the value of goods exported was led higher by large increases in meat, grain, and wool. Imports were 0.7% higher. Consumption goods imports fell by 3.9% led by large falls in passenger cars, food and beverages, and household electrical items.
The US personal consumption expenditure price index, closely followed by the US central bank, increased 1% in June, the largest increase since September 2005. Prices for goods were up 1.5% and services 0.6%, with energy prices doing most of the damage. Excluding food and energy, the price index rose 0.6%.
Following the US central bank’s last monetary policy statement, investors are now betting a nearly 69% probability that the Fed will raise its key interest rate by 0.50% in September, up from a probability of 44% last week. This comes after multiple consecutive rate increases of 0.75%.
New orders for US manufactured goods jumped by 2% in June on the same time last year, coming in above the May rise of 1.8% and well above market expectations for a 1.1% increase, reflecting strong demand for products. Petroleum and coal products were the biggest contributors.
A key US services index unexpectedly increased in July with the highest reading in 3 months and well above market estimates. Production and new orders drove the increase whilst the employment component fell less, and price pressures eased. However, inventories fell at a fast pace.
The Euro area economy expanded 4% in the 2nd quarter on the same time last year, or 0.7% on the previous quarter, easing from 5.4% in the previous period but above market forecasts of 3.4%.
European factory activity plunged in July as a result of ongoing supply chain complications and a slowing global economy.
The Bank of England raised rates by 0.50% to 1.75% in order to curb surging inflation which they expect to peak at over 13%, whilst at the same time predicting a UK recession would start in Q4 this year and continue through all of 2023.
The Chinese property market continues to worsen with the nation’s banks rushing to boost capital ahead of a potential spike in bad loans, potentially up to US$350 billion. In the large, Chinese banks have some of the highest regulatory capital ratios in the world which is a good starting point.
China’s factory activity unexpectedly contracted in July, reversing recent economic momentum, as covid outbreaks and the covid health policy response weighs on the recovery.
The US defended additional tariffs on hundreds of billions of dollars of Chinese goods whilst geopolitical tensions rose as Nancy Pelosi, the US speaker of the House, flew to Taiwan in defiance of China’s warnings. China threatening is par for the course, and whilst the Chinese do respect others pushing back on their threats, the timing of the trip was rather odd with even the White House agreeing so.
Ukraine laid out plans to cautiously ramp up grain exports after the first shipment since Russia’s invasion was an encouraging first step toward easing global food shortages and prices. The first 2 weeks are being treated as a trial period through new safe passage corridors with exports to increase if the trial is successful.
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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