THE late northern summer repose and the domestic focus on earnings season was dramatically disrupted by Jerome Powell’s short-but-direct speech at the Jackson Hole central bank conference last week.
Powell reminded the market of his singular focus on bringing down inflation, even if it brought “some pain to households and businesses”.
The S&P 500 slumped in response, ending down 4% for the week.
We’ve previously flagged that the market rally was running up against technical resistance and losing steam as the position covering played out.
The S&P is now down 5.5% and the NASDAQ off 7.5% from their Aug 16 highs.
Powell’s message was not so much the need for rates to go higher than markets expect. Rather, rates would need to be sustained at restrictive levels for some time to bring inflation under control.
This is at odds with recent optimism that rates would fall in 2023. This saw US two-year yields rise 17bps and 10-year yields up 7bps to 3.04%.
The Fed’s stance emphasises the importance of the total financial conditions index as a signal. It will not allow this to rise too far.
This means bond yields are underpinned and equities are capped while inflation remains an issue.
Three other developments also weighed on sentiment:
The petrol price remains a key signal for US inflation expectations — and therefore yields and hawkishness from the Fed.
So there is potential for inflation to resolve itself faster — requiring less policy pain if it comes down.
But for the moment the market is back in a nervous holding pattern with 4000 on the S&P 500 viewed as a key support level.
Australia enjoyed a short respite from global macro factors. On balance, the busiest week of reporting season delivered a neutral outcome.
Consensus expects FY23 earnings to rise 4%, up from +18% in FY22.
Revisions to earnings expectations are flat for FY22 and -2% for FY23 compared to four weeks ago.
In FY23 resources earnings expectations are now 4% lower and 1% higher for banks, with the rest of the market revised down 2%.
In terms of results, consumer staples disappointed as supermarkets proved less defensive than hoped. Companies delivering capital management — such as Qantas (QAN) and Nine (NEC) — performed better.
Fed Chair Powell kept his Jackson Hole speech short and narrowly focused for deliberate effect, sending a strong message on inflation.
The odds of a 75bp move higher in September have jumped to about 60 per cent.
The curve of implied hikes is moving back towards its June highs and is a long way above the end of July lows.
The market is divided into two broad camps:
The next Federal Open Market Committee meeting concludes on September 21 — so with more employment and inflation data to come the outcome is yet to be determined.
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In terms of inflation, the Core PCE price index rose 0.1% month-on-month — less than expected — and continues a run of incrementally more-positive data.
This may be an unwind following the June spike in core PCE.
Averaging across the two brings it back in line with the run-rate from January to May.
The Core Services PCE price index came in at 4.2% year-on-year. This was also lower than expected and is the lowest print since December 2021.
The Cleveland Fed’s ‘nowcast’ measure of inflation also continues to track lower, as do the Evercore surveys of wage pressure and retail pricing power.
The S&P/ASX 300 finished down 0.6% last week, not capturing Friday night’s slump in US equities.
It held up on the back of reasonable results and better performance from the resource and energy sectors.
Consumer staples underperformed on the back of disappointing results from Coles (COL) and Woolworths (WOW).
Small caps also underperformed, which is a sign that the rally driven by defensive positioning has run out of steam.
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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