A BOUNCE in US equities last week was underpinned by reassuring words from JPMorgan Chase CEO Jamie Dimon and a positive take on some Fed rhetoric.
At the same time, emerging caution on the near-term outlook for US companies seems to be taken positively as a sign of moderating demand — which may ease inflationary pressure and potentially the rate of tightening.
Nevertheless, the risk of recession remains front of mind — investor surveys place the chance at about 55%.
The S&P 500 gained 6.6% and the NASDAQ 6.9% last week. The S&P/ASX 300 was up 0.5%.
There is more data coming out that suggests supply chain stresses are abating while pressure on employers is seen to be falling.
China’s Premier Li Keqiang held an extraordinary conference call across multiple layers of government flagging near-term risk to the Chinese economy. This wasn’t sufficient to de-rail a strong week for the Australian Resources sector (+2%).
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Fed watchers sifted through the May FOMC meeting minutes and recent comments — and formed the view that tightening may pause in September.
Fed minutes showed “all participants concurred that the US economy was very strong, the labour market was extremely tight, and inflation was very high”. With risks of more inflation “skewed to the upside”, “participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture”.
They also noted policy may need to move beyond neutral to a “restrictive” stance.
“Most” participants judged 50bp rate hikes would be appropriate at the next couple of meetings. However “a number” said data had begun to indicate inflation “may no longer be worsening”.
Atlanta Fed president Raphael Bostik said he supported an expeditious return of monetary policy to a more “neutral” stance to bring down inflation. But policymakers must “proceed carefully in tightening policy”, being mindful of the uncertain effects of the pandemic, the war in Ukraine and supply constraints on the economic outlook.
Policymakers were unsure how quickly higher borrowing costs would bite demand, said Kansas City Fed president Esther George.
St Louis Fed president James Bullard — who has been the leading hawk — called for the Fed to frontload rates and get them to 3.5% by year-end.
This would enable them to ease in 2023 and 2024 if inflation is under control. He didn’t see a recession, but did see some businesses getting “punched in the face” as consumers substituted basic necessities for luxuries.
US data and inflation
April personal spending rose 0.9% month-over-month versus an expected 0.7%.
The American consumer remains resilient — despite low confidence surveys — and is benefiting from wage gains and the gradual draw down of accumulated savings and handouts. This gives the market a degree of comfort.
The PCE Price Index (which measures costs Americans pay for a variety of different items) edged up 0.2% month-over-month and 6.3% year-over-year.
Meanwhile the core PCE indicator (the Fed’s preferred inflation gauge which excludes food and energy and is used to make monetary policy decisions) advanced 0.3% on a seasonally adjusted basis.
The annual rate eased from 5.2% in March to 4.9%, in line with expectations.
Several drivers of inflation are showing signs of easing, though the pace of normalisation remains the obvious question mark:
The RBNZ raised rates 50bps to 2%, as expected. The Monetary Policy Committee is in a real hurry, with a very high likelihood of successive 50bp hikes in July and August. They flagged a peak Official Cash Rate (OCR) of about 4%, up from 2.6% only six months ago.
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They couldn’t be any clearer on their intent: “A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment.”
China’s cabinet introduced 33 policies to support consumer spending and businesses as the economic fallout from the zero-Covid policy bites deeper.
The package of about US$30 billion was extensive. It includes measures to boost infrastructure spending and rural road building; improve supply chain disruptions; provide cash subsidies to maintain staff levels; provide VAT rebates; and reduce taxes on car purchases.
There was plenty of commentary and results coming out of US companies last week.
It wasn’t all good news. But in conjunction with better economic data the market has gravitated to the view that after 50bps in July and August the Fed might be inclined to take a breather and see how the tightening is manifesting.
Sentiment was bolstered by Jamie Dimon’s remark that if the US does go into recession, it is likely to be moderate due to underlying strength in the economy and consumer.
There were also comments in this vein from Bank of America CEO Brian Moynihan. He noted consumers were buoyed by strength in household balance sheets right across the income spectrum — and they continued to grow.
Moynihan also noted credit card debt was rebounding from its lows (though it remains well below the pre-Covid level) and mortgage loan-to-value ratios remain in the 50%-60% range.
It wasn’t all one way traffic on the commentary front.
US social media company Snap fell 33% on reduced revenue and earnings guidance for the current quarter after issuing guidance a month ago. “The macroeconomic environment has fallen further and faster than we had anticipated,” management said. Other digital media businesses fell 5-20% in sympathy.
Commentary from US retailers was mixed.
Dollar Tree and Nordstrom were strong. But a mix shift in consumption saw a blow-out in inventories at Walmart and Target. Gap also reported a big miss.
Clearly there is no consistent playbook from the retailer’s perspective in this environment. Pivots in consumer demand are tough for retailers to keep up with.
Inflows resumed into equity funds globally after a run of outflow weeks. There was US$21 billion of inflows — the biggest amount in 10 weeks — mainly into US equities.
The Australian market lagged the US after several weeks of outperformance. Energy (+2%) and Materials (+1.7%) led. Technology (-3.4%) was the worst performer.
Stock moves were much more idiosyncratic than they have been for quite a few weeks.
BHP (BHP, +3.9%) merged its oil and gas business into the newly named Woodside Energy (WDS, +4.8%). Tabcorp (TAH, +2.2%) demerged its lotteries and keno division in The Lottery Corporation (TLC, +2.1%). The likelihood of further M&A activity remains high.
Incitec Pivot’s (IPL, -6.4%) 1H FY22 result missed EBITDA expectation by 8% as both the fertiliser and explosives divisions didn’t exhibit the operating leverage that has been evident in peer results. The big news was the proposed spin-off of the fertiliser business, which they have been trying to offload without success for many years. Fertiliser peers globally have retreated from the highs earlier in the year, which has impacted IPL as well.
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
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