May, 2022 - Macarthur Wealth Management

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Equity markets rise on Fed speak

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Local and global equity markets trended higher this week with investors reading into US central bank minutes that a rate hike slowdown or pause may be on the cards come the September quarter.

In local stock news, Crown Resorts shareholders overwhelmingly approved its takeover by US private equity group Blackstone for $13.10 a share.

Incitec Pivot shares fell after the company announced plans to spin its fertiliser business into a new company, Incitec Pivot Fertilisers, and will rename itself Dyno Nobel, after its mining explosive subsidiary. Not sure how this benefits shareholders.

Tabcorp traded this week as two separate companies for the first time, with the lotteries business spun out and trading as The Lottery Corporation, whilst the wagering assets remain with Tabcorp.

BHP shares fell during the week as its share went ex-dividend from the demerger of its oil business to Woodside.

Fisher & Paykel Healthcare shares fell after the respiratory products company declined to give any guidance for fiscal 2023, given the uncertainty regarding covid in the period ahead and the possibility its hospital customers might face more personnel shortages.

The Aussie dollar rose against the US dollar on rising expectations of the US central bank fading their rate hike program later this year.

The oil price took another leg up this week as US petrol demand is likely to be high over Memorial Day long weekend whilst US officials talked up banning US oil exports.

Economic

Total Australian construction work done fell by 0.9% in Q1 with building construction the major drag. Engineering construction also contracted. Both private and public sector work fell.

Australian private sector capital expenditure volumes fell by 0.3% in the 1st quarter, with both mining and non-mining investment falling by the same amount. The outlook for business investment remains strong, but headwinds of capacity constraints and rising costs will hurt.

A key US central bank official said they expect the bank to raise interest rates to 2% by August. That would imply another two 0.50% rate hikes over the coming months, which the market has already priced in. Uncertainty remains as to where rates head after that, with some members citing a pause or slowdown in rate hikes may be necessary come September.

The US central bank minutes from their May meeting showed broad agreement from members regarding moving rates higher and faster towards a more ‘neutral’ stance, that the US economy was very strong with a tight labour market, but that risks remain with the Ukraine conflict, China’s covid-zero stance, and restoring price stability given very high inflation.

US existing home sales in April fell 2.4% from March levels, boosting inventory of unsold existing homes to 1.03 million homes. First home buyers were the largest component of sales at 28%.

The US economy contracted at an annualised 1.5% in the first three months of 2022, slightly worse than initial estimates of a 1.4% decline, with the biggest drag coming from trade.

Most market predictions now have a 30-40% of the US entering recession sometime in the next 2 years. The US central bank will need to convince investors it can tighten monetary policy and reel in inflation without tipping the economy into a recession. Not an easy task.

A US manufacturing indicator fell in May from the previous month, coming in at the lowest level in 4 months and below market expectations. The reading remains at expansionary levels, but the pace of expansion was weight down by hikes in selling prices and concerns over higher rates. The rate of growth in new sales was the slowest since August 2020.

The European central bank president said that the bank was likely to lift the Euro area deposit rate out of negative territory by the end of September and could raise it further. Recession fears will need to be overcome.

UK consumer confidence fell to its lowest level in at least 48 years after surge in cost of living. Falling consumer confidence would usually result in more fiscal stimulus, but it can’t when you’ve got inflation surging and central bank needing/wanting to raise rates.

Chinese banks cut a key interest rate for long-term loans by a record amount. The cut is a significant move to boost loan demand. The lower rate will be applied to new mortgages immediately whilst existing mortgages won’t be repriced until next year at the earliest.

China will offer more than US$21 billion in additional tax relief mainly aimed at businesses as it seeks to offset the severe impact of covid-zero policies on the economy.

Politics

Labor’s Anthony Albanese is the 31st prime minister of Australia after the weekend’s federal election results with Labor yet but likely to form government, breaking the Coalition’s almost decade long run. Interestingly, both major parties received some of the lowest primary vote totals seen in some time. Four seats are still yet to be called.

The Chinese Premier gave his starkest warning yet about the economy as it comes under severe strain from covid outbreaks and lockdowns. He said the situation is worse than in 2020 and urged more efforts to reduce a soaring unemployment rate.

The US energy secretary said the Biden administration hasn’t ruled out a ban on oil exports to tame domestic fuel prices.

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US Fed hawkishness sees US dollar falter

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A mixed week in equity markets with global developed markets lower, the Australian market flat, whilst Asian and emerging markets saw investor support as the US dollar weakened.

In local stock news, Viva Energy shares rose to all-time high after the Shell petrol station operator announced that it was enjoying unprecedented profit margins from its Geelong refinery, which allows the company to import crude oil rather than rely on overseas refineries.

Brambles shares surged to an 8-month high after the pallet’s giant confirmed it had received an unsolicited tentative takeover offer from global private equity firm CVC Capital Partners. CVC later confirmed that would not be pursuing a takeover. Aussie companies with lazy boards/management getting picked off by cashed-up foreign raiders. More to come.

James Hardie shares fell after the building products company announced sales of US$3.6 billion in the 12 months to end of March, up 24% from a year ago but slightly below market expectations. The company reaffirmed it’s 2023 financial year guidance.

Andrew Forrest will take the reins of the company he founded almost 20 years ago after an extensive global search for a new leader failed to yield a better alternative, as current CEO Elizabeth Gaines exits the role in August.

Woodside Petroleum shareholders overwhelmingly approved the company’s $41 billion merger with BHP at Woodside’s annual general meeting in Perth. Shareholders also backed a name change to Woodside Energy.

Australian wages grew by 0.7% during the March quarter according to the Australian Bureau of Statistics. The lift was slightly below market expectations but did move the annual rate up to 2.4%. Private sector wages came in above public sector wage growth in the quarter. Interestingly, wages growth is not yet broad based and real wages growth (net of inflation) are deeply negative.

The Australian economy added 4,000 jobs in April, coming in well below market consensus, with a sharp decline in part-time employment. By state, there were small gains in NSW and VIC, whilst there were falls elsewhere. The unemployment rate was unchanged at 3.9% given the downwardly revised March number.

The ANZ bank has made a major revision to its house price forecasts for 2022 with a fall of 3% now expected on average across the 8 capital cities. Contrast that with their previous prediction of an 8% rise in 2022. The Australian housing market is always very sensitive to rate movements given the predominance of variable rate loans.

The US central bank chair reaffirmed that the bank is likely to raise interest rates by 0.5% at each of its next 2 meetings in June and July in an attempt to bring inflation under control. He said the bank was prepared to hike until there was clear and convincing evidence that inflation was starting to roll over. Those signs may be nigh.

US data showed signs of economic resilience, with US shoppers increasing retail spending in April for the 4th consecutive month, whilst US home prices reached a high in April. In contrast, new applications for unemployment benefits rose for the 3rd week in a row whilst the number of home sales fell.

According to the Institute of International Finance, the world economy will essentially flatline this year as Europe heads towards recession, China slows, and US financial conditions tighten.

Annual inflation in the UK jumped to 9% in April, the highest level since 1982, prompted by rising prices for electricity, gas and other fuels, and second-hand cars, in another sign consumers’ living standards continue to squeeze. The April reading compares with March’s 7% reading.

China’s economic activity is collapsing in the face of tough covid-zero rules with industrial output and consumer spending sliding to the worst levels since the pandemic began. Expect a big bazooka of stimulus over the coming weeks and months, which is likely to coincide with an easing of covid restrictions in some of their major cities.

Some European Union nations are wanting to delay a push to ban Russian oil so they can proceed with the rest of a proposed sanctions package if the bloc can’t persuade Hungary to back the embargo. Germany has said they will stop importing Russian oil by the end of the year regardless of the bloc’s moves. Russia’s oil revenues are up 50% this year even with various trade restrictions. Whilst there is general agreement that Putin needs to be punished, likely energy rationing and soaring energy bills don’t sound like a good idea for some European countries.

NATO members have rallied around Finland and Sweden after they announced plans to join the alliance, marking another dramatic change in Europe’s security structure.

China’s top economic official gave an unusual public show of support for digital platform companies, suggesting Beijing may be ready to let up on a long campaign against the tech giants. A good move, but also shows Beijing getting desperate on the economic growth front.

The US is preparing a military aid package for India to deepen security ties and reduce the country’s dependence on Russian weapons, according to people familiar with the matter. If true, it would make India one of the largest recipients of such aid behind Israel and Egypt.

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Commodity prices fall on Chinese growth concerns

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Local and global equity markets were flat to weaker this week on concerns regarding rising global recession risks, with Chinese economic growth fears hitting commodity prices.

In local stock news, Macquarie Group has reported a net profit after tax of $4.7 billion for the year to end of March, an increase of 56% on the previous year. The firm’s assets under management reached $775 billion during the period, up 37% on a year earlier. The big boost came from the commodities and global markets businesses.

REA Group shares fell after the realestate.com.au operator predicted national listings would be down in the 4th quarter on the same time last year. But the company maintained that the Australian property market is very healthy with solid fundamentals.

Westpac reported cash earnings of $3.1 billion in their half-year result, a 71% increase on the same time last year. However, cash earnings declined over the year which the company attributed to competitive pressures on net interest margins.

CBA announced a $2.3 billion in net profit after tax, with income down 1% on continued margin pressure. The bank also reported a steady operating performance and volume growth compared to the previous corresponding period, with household and business deposits up $8.5 and $2.2 billion respectively. Home lending was up $6.9 billion with business lending up $3 billion.

Magellan Financial Group shares fell after announcing it had sold its 11.6% stake in Mexican fast food restaurant chain Guzman y Gomez to Barrenjoey Capital for $140 million, a 36% premium to its entry price 16 months ago. Magellan expects to book a pre-tax profit on the sale of $34 million.

Magellan also announced a new CEO, hiring David George from the Future Fund. He will start in August.

Pendal Group shares were up after the investment manager hiked its interim dividend by 24% as last year’s acquisition of a US-based investment manager has proved successful.

The oil price fell sharply early in the week on recession fears before rising on supply concerns to finish the week flat.

The Australian dollar fell this week as commodity prices took a breather whilst the US dollar rallied again.

The RBA has materially upgraded their forecast for underlying inflation putting the core figure at 4.6% at end of 2022, with underlying inflation then moderating over 2023 but remaining above the RBA’s 2-3% target band. The RBA also expects wages growth to continue increasing and reach 3.7% by mid-2024.

The Australian trade surplus rose to $9.3 billion in March, above market estimates. Exports were flat due to a 21% fall in non-monetary gold. Other export data showed rural goods fell, meat rose, and non-rural rose. Imports fell by 4.6% after a 13.4% lift in February, with falls in consumption, capital, and intermediate goods. Net exports will likely detract from economic growth.

Building approvals decreased by 18.5% in March, following a large bounce in February. Approvals are now down by 35.6% over the year. The drop in monthly approvals was driven by a drop in multi-unit dwellings with private houses also falling but to a lesser extent. QLD and WA were the only states to record increases.

Australian retail trade volumes increased by 1.2% in the quarter and are now 10.7% above pre-covid levels. Increased prices are contributing to the strong growth, which is also being buffeted by strength in the household sector.

Australian consumer sentiment fell sharply, down by 5.6% in May. In contrast, business conditions improved in April, but confidence did ease, with both remaining above their long-term averages. The divergence between consumer sentiment and business confidence is very wide.

The US annual inflation rate slowed to 8.3% in April, but still came in above market expectations of 8.1%. Energy prices continued to rise, but came in below March’s increase, whilst food prices jumped the most since April 1981. Prices for shelter and new vehicles also rose slightly. Interestingly, consumer prices rose, coming in slightly above expectations, but well below March’s 16-year high.

The latest US jobs report showed that the US economy added 428,000 jobs in April and that the unemployment rate remained unchanged at 3.6%. New jobs came in above expectations whilst the unemployment rate came in slightly above expectations.

In contrast, private US businesses hired 247,000 workers in April, the least since April 2020, and well below forecasts of 395,000.

China’s export growth slowed to the weakest levels in almost 2 years whilst imports barely changed in April, as tighter and wider virus curbs halted factory production and crimped domestic demand. The weak figures show China’s trade sector, which accounts for more than 30% of economic growth, is losing momentum as Covid-zero policies hit home.

Chinese inflationary pressures eased last month pointing to a moderation in core inflation.

Leaders of the Group of Seven most industrialised countries pledged to ban the import of Russian oil in response to President Putin’s war in Ukraine. The US and UK have already announced bans on Russian oil imports and Germany has backed a proposal for the EU to get rid of it by January.

However, the Italian PM said European companies will be able to pay for Russian gas in Rubles without breaching sanctions, dismissing EU guidance to the contrary.

The US House approved a more than US$40 billion emergency Ukraine spending bill with broad bipartisan support. The legislation is significantly larger than the package sought by President Biden and includes funding for weapons, economic, and humanitarian aid.

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Aussie dollar falls on surging USD

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Local and global stocks largely finished flat for the week as markets recovered from falls earlier in the week.

In local stock news, Coles Group announced March quarter sales up 3.9% to $9.3 billion, even as flooding in NSW and QLD forced the temporary closure of 130 stores.

Mirvac shares rose after the builder said it had navigated challenges from Covid and wet weather to sell 2,332 residential lots during the March quarter, up from 2,282 in the same period a year ago.

The oil price surged again this week as Russian supply concerns rose, particularly for Europe, whilst Chinese announcements of further stimulus also provided support.

The Aussie dollar fell to a low of US70c during the week as the US dollar surged and concerns regarding Chinese economic growth put downward pressure on spot commodity prices.

Australian headline inflation rose by a huge 2.1% in the March quarter taking the annual rate to 5.1% according to data from the ABS. Significant contributors to the quarterly print included new dwellings, fuel, and tertiary education. The RBA’s preferred core or underlying measure rose 1.4% in the quarter with the annual rate rising to 3.7%, above the RBA’s target 2-3% band.

The US economy contracted at an annualised pace of 1.4% in the March quarter, well below forecasts for a 1.1% expansion, and following 6.9% growth in the December quarter of 2021. Exports dropped 5.9% while imports surged 17.7%. Private domestic investment slowed sharply whilst government spending continued to decline. On the positive side, consumer spending increased as did fixed investment (particularly non-residential).

The US central bank chair reiterated a bias for aggressive rate hikes with markets now betting on 0.5% increases in May, June, and possibly July.

The US is building more homes than it has in 16 years as supply tries to keep pace with very strong demand. Housing starts rose to an annual rate of 1.79 million in March.

French President Macron won a 2^nd term in the weekend’s election over rival Marine Le Pen with 57% of the vote. The win was by a smaller margin than the 2017 elections with Le Pen gaining ground and breaking through the 40% threshold which is rather unprecedented for French nationalist parties.

The Russian foreign minister has warned that there’s serious danger of nuclear conflict just one week after he said Moscow was committed to avoiding the use of nuclear weapons. It’s either a threat to bring about an end to the current conflict swiftly or it’s a threat to ensure no other external involvement from other countries.

Russia has cut off gas to Poland and Bulgaria after both countries refused to meet Russia’s request to pay for their supplies in Rubles. European gas prices surged by as much as 20%. Not good for broader Europe, and especially for Poland and Bulgaria given their significant reliance on Russian gas. Both countries stuck in a hard place as Western sanctions won’t let them pay for the gas in Rubles.

Chinese President Xi continues to come under pressure to relax his Covid-zero policies which are bringing the economy to its knees. Xi said China would step up infrastructure construction in their latest pledge to bolster the economy.

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