EQUITY markets continue to drift lower and now sit at an interesting juncture.
Last week the S&P/ASX 300 fell 1.21% and the S&P 500 lost 1.26%.
The bullish perspective is:
The bearish perspective is:
In Australia we saw the departure of Philip Lowe as Reserve Bank governor, which coincided with abysmal data on productivity and weak GDP data.
This highlights the fundamental challenges facing our economy.
A reliance on immigration and commodities to support growth leaves us vulnerable to an inflation surprise or a growth problem (or both) if the current environment shifts.
Positive signals continued on the inflation front.
The Atlanta Fed Wage Tracker fell from 5.7% to 5.2% in August, further supporting the “immaculate disinflation” thesis.
The “job switcher” category has now almost fallen into line with the “overall” category.
This supports the case that the main wage-inflation driver was the ramping up of many businesses post-pandemic — and as time goes by this is being resolved.
Combined with slowing growth, companies are becoming wary of chasing too many new hires.
This can be seen in the “job-workers” gap that Goldman Sachs has been estimating. This indicates how job openings have fallen away without unemployment needing to rise materially.
The counter to this view is that wages growth has softened due to a recent drop in inflation which may itself be overstated.
Inflation may start to rise again, given oil price moves and an end to the benefit of supply chain problems unwinding.
This may suggest the declining wage trend is overstated.
On this front the outcome of the United Autoworkers dispute will be an interesting test for persistent wage pressures.
There are 146,000 members seeking a 46% pay increase over four years ($32/hr to $47/hr at the top rate) plus the right to represent workers at electric vehicle battery factories (among other demands).
The union has given the big auto makers until Thursday to come to an agreement.
Economic news continues to support a soft landing. Goldman Sachs, for example, has reduced recession risk to 15%.
One area of contention in the economic debate is how consumers will behave.
Many expect spending to come under pressure with reduced excess saving, a fall in government support in areas such as student loan payments and lower small business rebates, childcare payments and Medicaid coverage.
Goldman Sachs presents a more optimistic view on the consumer which looks at the impact of higher real wages, more hours worked and increased interest income.
They expect this will allow real income growth of 3% in 2024.
This is skewed to higher-income earners due to interest payments, but should translate into consumption growth of 2% without relying on drawing down of savings.
Chinese property developer Country Graden got a stay of execution.
It received approval from onshore creditors to extend payments, allowing them to make payments on offshore bonds ahead of a Tuesday deadline. If this went unpaid it would have triggered default clauses on other loans.
Housing remains the key challenge, with sales slowing.
There has been further lifting of homebuyer curbs in tier-two cities. Beijing’s clear message is easing developer liquidity stress and supporting demand for durable goods.
It is worth noting a signal from the Chinese bond market, which reversed last week.
Rising yields suggest the market may be beginning to believe we have seen a peak in growth concerns.
Another issue to watch is Chinese domestic politics. There are stories of unrest over economic performance, while Xi chose not to attend the G20.
Australian GDP grew 0.4% in the June quarter and 2.1% year-on-year.
While in line with expectations, this highlighted some economic challenges. GDP per capita fell 0.3% for the quarter given strong population growth.
When it comes to company earnings, aggregate spending is what counts.
Looking at the breakdown of data:
The real shocker in the data is productivity, which fell 1.6% for the quarter, 2.1% year-on-year — and is now back to 2016 level in absolute terms.
This means unit labour costs are rising 7.5%, which is usually tied to services inflation.
Employee compensation growth is strong at 1.6% quarterly and 9.6% yearly. Households continue to find ways to supplement income.
Australia is an economy with slowing growth, reliant on government spending, business investment and commodity exports. All of this is either unsustainable or volatile.
Meanwhile productivity is very weak, which will probably either lead to profits coming under pressure, higher unemployment or more price inflation as companies pass costs on.
There is a lot of attention on the US dollar, which appears to be breaking higher.
This is usually associated with liquidity tightness and weaker markets.
Oil continues to push higher, supported by Saudi and Russian plans to extend production cuts.
However it is unlikely to be allowed to go much higher, given the impact that can have on global economy and substitution.
Apple had a poor week, falling about 6 per cent on China’s threat of an iPhone ban. This is possibly a warning about shifting too much of its supply chain out of the country.
This week’s annual Apple product day will be an important test of sentiment, given its lead status for tech and the market overall.
It may help inform whether bull or bear thesis plays out.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
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