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US Fed says inflation fight far from over

Markets

  • Local and global equity markets gave back some gains this week as investors reacted negatively to the US central bank chair’s testimony that the inflation fight was far from over.

  • Australia’s government bond yield curve inverted for the first time since the GFC. Yield curve inversions, where short term yields are higher than long term yields, are usually a good indicator of impending recession.

  • The US equity market has technically entered a bull market rising by 25% since its October low and more than 14% this year alone. The surge has largely been driven by large technology names. Around 90% of market’s gain has come from just seven stocks.

  • In local stock news, AGL shares rose strongly to a two-year high after Australia’s largest electricity generator predicted its profit for 2023/24 would more than double to between $580 million and $780 million benefiting from price hikes.

  • Woodside shares rose after the energy giant decided to proceed with a $10.6 billion oil field development in the Gulf of Mexico.

  • Flight Centre shares fell after the company forecast full-year earnings of $270 to $290 million, up slightly from its February guidance, but obviously disappointing investors.

  • TPG shares fell after the Australian Competition Tribunal backed the ACCC’s rejection of its $1.8 billion spectrum sharing arrangement with Telstra. The Telstra CEO called the outcome disappointing.

  • The Aussie dollar fell slightly this week as the US dollar rose with market expectations shifting to further US Fed rate hikes.

  • Crude oil prices fell below US$70 a barrel this week as traders reacted to the surprise Bank of England rate hike of 0.50%.

Economic

  • The RBA Board’s June minutes indicated that the decision to raise rates by 0.25% was a close one, with upside risks to inflation ultimately driving the rate hike.

  • Commonwealth Bank of Australia new housing lending rose in May, led by lending to investors, after a fall in April. The average loan size for investors rose sharply in the month. Lending for alterations & additions rose in May but is down by about 11% over the last three months.

  • According to S&P Global Ratings, Australia’s home loan market can easily cope with another 0.50% of rate rises without sparking a sharp increase in mortgage arrears. Time will tell.

  • US housing starts came in higher than expected for May, driven by both single family and multi-family projects. The data shows the US economy remains robust which may put additional pressure on the US Fed.

  • A key US consumer sentiment survey increased to 63.9 in June, the highest in four months, up from 59.2 in May and above forecasts for a reading of 60. The increase likely reflected greater optimism as inflation eased and the debt ceiling was resolved. Interestingly, one year forward inflation expectations fell to 3.3%.

  • US consumer confidence increased to 63.9 in June, up from 59.2 in May and above expectations for a reading of sixty, according to a key survey.

  • US import prices dropped 0.6% in May, against expectations for a 0.5% decline, which follows a downwardly revised 0.3% increase in April. Import fuel prices fell 6.4%. On a yearly basis, import prices have fallen 5.9%, the largest decrease in three years.

  • US existing home prices posted their biggest year on year decline in more than 11 years as rising interest rates weigh on the housing market.

  • UK CPI inflation stayed unchanged at 8.7%, rather than falling as markets had expected, while core inflation unexpectedly rose to 7.1%, the highest since March 1992.

  • The Bank of England hiked rates by another 0.50% this week following the stronger than expected inflation print. This is the 13th consecutive hike and takes rates to 5%, the highest since April 2008.

  • The Bank of Japan kept its interest rates unchanged at 0.1% and maintained their targeting of 10-year bond yields at around 0% at its June meeting. The Bank expects inflation to slow later this year and remains committed to achieving 2% inflation.

  • The Chinese central bank provided additional stimulus this time cutting two key lending rates for the first time since August 2022, as authorities seek to prop up growth.

Politics


  • Chinese President Xi and US Secretary of State Antony Blinken agreed to stabilise their US-China relations in Beijing talks. But the talks failed to produce any major breakthroughs. A good first step in making sure things don’t get any worse and should lead to more open communication. It didn’t last long as US President Biden couldn’t control himself, referring to Xi as a dictator.


Weekly market updates are written by Chris Lioutas. Chris is on the board of Peer Wealth X Futuro Investment Committee. View LinkedIn


Disclaimer: The material and contents provided in this article contains general information and does not take into account your personal objectives, financial situation or needs. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, please contact Peer Wealth on (02) 8014 7608.



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