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US inflation highest in 40 years

MARKETS

Equity investors outside of the US seemed to take the highest US inflation in 40 years in their stride, helped by strong returns earlier in the week.

A generally positive US earnings season has helped support stocks. With results in from about 60% of the largest 500 companies, analysts expect profits rose 30% in the 4th quarter from a year earlier. This is up from estimates for 21% growth at the end of September.

In local stock news, Magellan Financial Group shares fell again as Hamish Douglass announced he would step down as chairman and take a medical leave of absence. He will be replaced by REA Group chairman Hamish McLennan whilst investment management duties will fall to Chris Mackay and Nikki Thomas, who have re-joined, and other senior portfolio managers within the business.

Macquarie reported a record 3rd quarter, helped by its markets-facing businesses, with Macquarie Capital earnings helping offset a decline in the annuities divisions such as banking and financial services.

Suncorp posted a near 21% fall in 1st half net profit after more insurance claims from natural disasters. But the company said its underlying business is strong, putting it in a good position in the 2nd half of this financial year.

Commonwealth Bank has reported a 30% growth in cash profits for the 1st half of the financial year increasing their interim dividend by 17%. The bank reported a 12.2% increase in household deposits and an 8.5% jump in home lending. Capital position remained strong. The company plans to buy-back up to $2 billion of its shares on-market, following the $6 billion off-market buy-back in the 1st half.

Computershare upgraded its full-year earnings forecast after 1st half figures beat expectations, with higher sales and profits from its register maintenance business.

As the oil price remains high, the number of US oil rigs rose very modestly to 497, its highest since April 2020. Even though the rig count has climbed for a record 17 months in a row, the weekly increases have been very modest, and production remains far from pre-pandemic highs.

ECONOMIC

Australian consumer sentiment fell again in February, only just remaining in positive territory. Rising inflationary pressures and increasing expectations of higher mortgage rates are negatively impacting sentiment. Changes in business conditions and confidence were mixed in January.

The annual inflation rate in the US accelerated to 7.5% in January, the highest since February 1982, and above market forecasts of 7.3%, as soring emerging costs, labour shortages, and supply disruptions couple with strong demand weighed. Excluding volatile energy and food categories, inflation rose 6%, the most since August 1982.

Private businesses in the US unexpectedly cut 301,000 workers in January, the first job loss since December of 2020 and the biggest since April 2020. Investors were expecting a job gain of 207,000.

The US economy unexpectedly added 476,000 payrolls in January, much better than market forecasts of 150,000, and in stark contrast to the job losses reported in the private sector ADP.

Two key US labour market metrics may take multiple years to recover to their pre-pandemic growth trend, with the labour-force participation rate and the employment-to-population ratio languishing due to high level of retirements and others leaving the workforce altogether.

A noted European central bank hawk said he expects an interest rate increase as early as in the 4th quarter of this year, as he expects Euro-area inflation to stay above 4% for much of 2022. A noted US central bank hawk tried to one-up his Euro-counterpart, suggesting a US cash rate of 1% by July.

POLITICAL

The Australian federal government announced a relaxing of border rules which will see us welcome visa holders into the country from February 21. Tourism operators are still haemorrhaging some $4 billion a month compared to pre-pandemic levels. The federal government has maintained they will not seek to boost immigration rates to “make up” for the last 2 years. Smart move leading into an election, but a poor move from an economic perspective.

Federal Treasurer Josh Frydenberg has indicated that its time to close the federal money tap and hand responsibility for the economy back to industry.

Russia reached new long-term supply deals with China as the Kremlin aims to strengthen ties with the Asian nation at a time of souring relations with the West.

US president Biden said the Nord Stream 2 natural gas pipeline between Russia and Germany would be stopped if President Putin orders an invasion of Ukraine. An invasion is highly unlikely.

Europe and the US are accelerating steps to roll back virus restrictions as politicians across both regions are deeming many public-health measures increasingly unnecessary as they come under pressure from a pandemic-weary public.

The US is apparently losing patience with China after the nation failed to meet its purchase commitments under the trade agreement reached during the Trump administration. China had pledged to buy an extra US$200 billion in US agriculture, energy, and manufactured products in the 2 years through the end of 2021. The Biden administration is under increasing pressure to show it’s willing to punish China for not holding up its end of the deal.

33 Chinese entities including electronics, optics, and healthcare/biotech companies, were added to a US “unverified list” that subjects them to tighter export controls.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Equity markets mixed as relief rally soured by US tech sell-off

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

MARKETS

Equity markets were mixed this week as a strong rally earlier in the week was soured by US tech sell-off and more hawkish comments and action from both the European central bank and the Bank of England.

Reported 4th quarter US corporate earnings have continued to come through stronger than expected, with 78% of companies beating analyst estimates and more than 80% having met or beat expectations. Analysts are expecting that profits from companies in the S&P 500 rose 24% in the quarter from a year earlier.

Money markets are now expecting almost 5 interest rate increases from US Fed this year and 4 from the Bank of England. There’s also speculation that the US Fed might front-load hikes by increasing rates in larger increments, which Fed officials have poured cold water on. All will largely depend on inflation dynamics from here but will also be a function of what interest rate level the economy and markets can absorb and withstand.

In local stock news, Telstra has announced it will spend up to $1.6 billion on two projects over the next 5 years. The spending is projected to provide a $200 million earnings contribution by 2026.

Westpac has reported a net profit of $1.82 billion in the December quarter, up 80% on the quarterly average for the 2nd half of 2021. Cash earnings were up 1%, but the net interest margin declined 8 basis points to 1.91%. Total loans increased 0.7%.

Sydney Airport shareholders have voted for a $23.6 billion takeover bid from a consortium of investors, with shareholders to receive $8.75 per share.

Oil prices moved higher this week after OPEC+ stuck to planned moderate output increases (400,000 barrels per day) despite pressure from customers and consumers to raise output more quickly. The group has blamed rising prices on the failure of consuming nations to ensure adequate investment in fossil fuels, whilst Russia/US tensions also haven’t helped.

The Aussie dollar rose as the US dollar took a tumble after both the European and England central banks turned more hawkish in their rhetoric and actions.

ECONOMIC

The Reserve Bank of Australia left rates unchanged at 0.10% but announced an early finish to their quantitative easing (money printing) program, giving the bank the green light to begin raising rates. The bank made it abundantly clear in their statement that they’re in no rush to raise rates, but markets are currently predicting a rate lift-off in either June or August. Inflation, particularly wage growth, will be key.

Australian private sector credit rose by 0.8% in December to take the annual rate to 7.2%, the strongest rate since November 2008. Both housing and business credit were strong, whilst personal credit fell in December and remains well below levels a year ago.

Australian retail trade fell by 4.4% in December affected by virus issues, falling more than consensus estimates, but remains at near record levels. Food retailing was the only positive, with large falls coming from department stores, clothing & footwear, and household goods.

Australia’s trade surplus narrowed in December as imports rose strongly in the month relative to exports. Exports were mixed, with iron ore rising strongly and reasonable growth from wool and meat, whilst coal fell sharply as did other rural exports. Imports were boosted by strong gains across all the goods categories.

Australian building approvals rose strongly in December, boosted by a surprising lift in multi-unit approvals. In contrast, private detached house approvals fell as momentum continues to slow. Over the past year, the number of approvals is lower by 7.5%, however, alterations & additions approvals remain elevated.

US data showed that the central bank’s preferred measure of inflation rose at 4.9% in December over the prior year, pushing well above the bank’s target.

A separate measure showed US employers spent 4% more on wages and benefits over the past year, an increase not seen since 2001, as a tight labour market encouraged workers to demand higher pay. However, employment costs didn’t rise as much as expected in the 4th quarter easing concerns that wages are advancing too quickly.

US consumer spending fell in December as rising prices and virus fears took their toll.

US manufacturing activity slowed in January, from December, but remained in expansionary territory. Supply chain impediments caused by virus health policies were among the issues that weighed on activity.

The Bank of England voted by a majority 5-4 to increase the cash rate by 0.25% to 0.50%. Members also voted unanimously for the bank to begin to reduce the stock of UK government bond purchases by ceasing to reinvest maturing assets – i.e., reduce the size of their balance sheet by taking the liquidity away they previously provided via money printing. They will also begin to unwind the stock of corporate bond purchases.

The European central bank maintained key interest rates at record low levels in February and pledged to steadily reduce its bond purchases (money printing) this year. Rate rises are unlikely in 2022.

China’s economy continued to slow at the start of the year with manufacturing output slipping and Covid-zero policies curbing consumer spending.

POLICTICS

Russia/US tensions continued to rise this week with Russia maintaining they have no plans to invade and Ukraine trying to calm tensions on all sides. US lawmakers are apparently close to finalising the language for a sanctions bill that could include some penalties even if Putin doesn’t invade. The US has also given the green light to move troops from the US to Europe and to move troops within Europe closer to the Russia/Ukraine border.

Some 300,000 Australian fossil fuel jobs could be wiped out through declining international demand for fossil fuels, new modelling predicts. There’s a widely held belief that those job losses will be easily absorbed, but that doesn’t appear to be apparent with renewable sources of energy largely developed using automation. The job losses will disproportionately impact regional centres. Job transitions and retraining are never easy.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Markets buoyed by US stimulus bills

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. https://www.macarthurwealth.com.au

Local and global equity markets rose strongly this week buoyed by strong company earnings results, the passage of the US infrastructure bill, and progress on the bigger budgetary bill.

Analysts now expect 2^nd quarter profit growth of 93% for the 500 largest US companies. With their quarterly reporting season almost complete, 87% of companies have beat analyst expectations, which is the highest beat on record.

In local stock news, general insurer Suncorp improved full-year cash earnings by 42% with shareholders to receive a special dividend, whilst the company will also undertake an on-market stock buyback.

Toll road operator Transurban revealed that the costs of the West Gate tunnel project in Melbourne have blown out by about $3.3 billion. The company reported statutory profit of $3.27 billion. Lockdowns in Sydney, Brisbane, and Melbourne have reduced the number of cars on the road and have weighed on revenue.

Commonwealth Bank of Australia released its 2021 financial year results reporting a $1.4 billion increase in cash profit to $8.7 billion over the last 12 months, an almost 20% increase. The bank also announced a $6 billion off-market stock buy-back.

The gold price had fallen sharply over the last week and half before mounting somewhat of a recovery in the last few days. A stronger US dollar along with the continuing economic recovery and expectations of the US central bank paring back its stimulus program have all put downward pressure on the gold price of late.

The iron price has continued to fall from its lofty heights following a report which said that China wants to limit steel makers’ impact on its environment, which made investors reassess their expectations for iron ore demand.

The Reserve Bank of Australia has revised its economic growth forecast down to 4% for 2021 but has kept their forecast for unemployment at 5% for the same period. They did revise their unemployment forecast for 2022 down to 4.25% and left their inflation forecasts unchanged at 1.75% for 2022 and 2.25% for 2023.

The negative impact of lockdowns have begun to rear their ugly head, putting aside the societal issues, as more than 15,000 home and business owners were unable to repay their loans in July. In addition, an additional 150,000 Australians became unemployed last month according to Roy Morgan. Their latest data showed the bulk of the job losses came from part-time work whilst 61,000 full-time workers also became unemployed. 619,000 workers are now looking for full-time work whilst 803,000 are looking for part-time work.

July saw the National Australia Bank business confidence index and business conditions fall sharply, which isn’t surprising given the size and extent of lockdowns in a number of states. Australian consumer sentiment fell by more than 4% in August as consumers’ fears of unemployment rose sharply.

US consumer prices for July rose at its slowest pace in the past 5 months as some price increases have subsided on the back of softening demand and increased supply. Even so, the July inflation number of 0.5% is still quite high, with the annual rate at 5.4%, as demand pressures and supply issues remain.

US nonfarm payrolls increased by 943,000 jobs last month a Labor Department report showed. Economists had forecast payrolls would increase by 870,000. The report also showed strong wage gains as employers competed for scarce workers as many workers remain at home collecting overly generous unemployment benefits. The unemployment rate also dropped to a 16 month low.

The US central bank had contrasting rhetoric from a couple of members this week with one suggesting that the US should be well past the pandemic crisis before the central bank raises rates. Another member said high inflation this year may have already met one of the bank’s benchmarks for raising rates.

The Germans have again warned that inflation in the Euro area could pick up faster than expected and urged the European central bank not to drag out their emergency bond-buying program.

A gauge of investor expectations for the German economy plunged to 40 from 63 points in July as fears about the impact of the delta variant gather pace.

Chinese economic data showed exports rising by 19% in July on the same time last year, coming in just under expectations, whilst imports were up 28% on the same time last year, also coming in below expectations.

China’s central bank has fanned expectations of further monetary policy easing, saying in its latest quarterly report that inflation pressures are controllable whilst highlighting risks to the economic growth outlook.

The US Senate voted to progress the US$1 trillion infrastructure bill with 19 Republicans voting with Democrats to support the push. However, the Democrat leader of the House has said she will only bring the bill to a vote after the Senate passes a separate US$3.5 trillion bill which has all kinds of things in it, most of it Democrat election promises, which the Democrats will likely look to push through via a process called reconciliation (ie. without Republican support). The debt ceiling (currently at US$28.5 trillion….) with partisanship likely to make it a tough task.

The Biden administration faced some hard truths this week as it pertains to foreign policy. A return to the Iran nuclear deal looks to be dead in the water as Iran races towards the capacity to build a nuclear bomb in light of perceived US weakness. The US will now be sending troops back into Afghanistan following an ill-advised move earlier in the year to remove US troops from the country. The country has again become a hotbed for terrorism with the Taliban carry out deadly attacks against US allies left behind. Lastly, US energy self-sufficiency is very much a thing of the past after US oil inventories got so low that President Biden had to ask OPEC+ to increase supply. US inventories are low due to increase in demand, but mainly due to government policy banning new investment in oil & gas and pipelines.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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A great way to help your kids – and you

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. www.macarthurwealth.com.au

We are always hearing about how important it is to insure our own lives and income, but what about insuring our children’s.

How would your adult child and their family survive financially in the unfortunate event of an accident or an illness that prevented them earning an income for an extended period of time?

Income protection, TPD and trauma insurance are often not a consideration to a young family in today’s financial climate with many struggling with mortgage repayments, education spending and increased living costs.

But what would be your role if your child and their family were suddenly without an income? Without adequate insurance how would they cope?

What if you had helped your child to buy his or her first home and that child suffered a long term-illness or disability? How would that affect you if they couldn’t make the repayments?

Here’s a scenario…

Alan and Joanne’s married son Tim was involved in a car accident, sustaining a spinal injury that prevented him from working for two years. Unfortunately, Tim did not have income protection or accident insurance.

The bank foreclosed on his mortgage and Tim and his young family were forced to move in with Alan and Joanne. Eventually, Tim recovered and was able to return to work.

Aside from the emotional impact on Tim and his family, Alan and Joanne’s retirement plans were seriously compromised. Joanne’s health deteriorated due to the extra stress of the situation, and she was diagnosed with severe depression.

What could Alan and Joanne have done differently?

They could have asked Tim if his income was protected in the case of an unforeseen illness or injury, Learning that the young couple was allocating all spare cash to the mortgage, the parents might have offered to help pay for adequate insurance cover.

Even if you are not in a position to contribute to the cost of their insurance, raising the issue with your adult children and encouraging them to talk to a financial professional could be some of the best guidance you could ever give them.

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. www.macarthurwealth.com.au

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Company reporting season buoys investor sentiment

Need help? Contact Macarthur Wealth Management for expert financial planning in Parramatta and Sydney wide. (02) 9683 2869. https://www.macarthurwealth.com.au.

Local and global equity markets largely trended higher over the week, buoyed by strong company earnings results and slightly more dovish central bank sentiment.

Results for US corporate quarterly reporting season have been much stronger than expected at the half-way mark, with 92% managing to meet or beat earnings estimates while 86% have done so on the revenue side, making it the highest beat ratios since 1^st quarter 2008.

In local stock news, National Australia Bank announced it will buy-back $2.5 billion in shares. The buy-back will happen in August and follows ANZ declaring a similar move earlier this month. Banks are awash with capital following wealth management sales and provisioning for bad debts which never eventuated as the government and central bank saved everyone.

Ryan Stocks has become the chairman of Boral after Seven Group gained almost 70% of the company through its takeover efforts. Seven has also installed its CFO as a director, whilst the previous Boral chair has retired and 2 other board members will retire after the AGM.

US digital payments giant Square Inc has agreed to acquire Afterpay in a deal worth $39 billion, or $126.21 per share. The all-stock deal will see Afterpay integrated into the existing Square ecosystems worldwide. Afterpay’s board has unanimously recommended the deal to shareholders. Afterpay shareholders are expected to own 18.5% of Square once the deal is enacted.

Oil Search’s board has endorsed Santos’ offer of $4.52 a share, which will make the combined company one of the 20 largest oil and gas providers in the world.

The oil price trended lower this week as concerns arose regarding the pace of the global economic recovery in light of increasing virus restrictions in some countries.

The Reserve Bank of Australia has unsurprisingly kept the cash rate at 0.1% at their August meeting. Given current lockdowns across the eastern states, any rhetoric about the bank moving earlier than expected to remove stimulus has now gone.

Concerns continue to mount regarding the economic recovery given the continued length of the Sydney lockdown (including army deployment), with Melbourne and parts of Brisbane also now under lockdown. 3^rd quarter economic growth will be negative and 4^th quarter isn’t looking too good at this stage, which might see the economy dip back into recession.

Australian credit rose by a solid 0.9% in June, boosted by a 1.6% business credit, likely the result of businesses drawing down credit facilities to survive the lockdowns. Housing credit also posted a strong lift for the month with both owner occupier and investor credit rising. Personal credit fell, hardly surprising given concerns regarding the length of lockdown.

Australian dwelling prices rose by a solid 1.6% across the 8 capital cities in July, with annual growth sitting at 15%. Price rises in July were particularly strong in Sydney, Brisbane, and Canberra. Regional prices increased by 1.7% in the month. The monthly rate of growth peaked in March this year at 2.8%, and has since trended lower, but the pace of growth remains strong.

Residential building approvals in Australia fell by 6.7% in June, driven by a large drop in approvals for houses as growth settles at lower rate post the HomeBuilder scheme finishing. New lending for housing fell by 1.6% in June, with lending to first home buyers driving the fall whilst lending to investors rose.

Plenty of rhetoric from US central bank members this week pointing to internal differences of opinion but not so far apart as to cause any major issues for chair Jerome Powell on the communication front. A couple of prominent members waxing lyrical about the economy being strong enough to see a reduction in money printing from 2022 and potential rate rises in 2023.

US private payrolls data increased by a significantly less than expected 330,000 in July, versus expectations for more than 690,000.

Price increases are starting to hit home in Europe with Germany’s inflation rate jumping to the highest level since 2008. Likely temporary given both the demand (government stimulus, restricted travel) and supply shocks (restricted work practices, border restrictions on labour, commodity price increases), but the data will fuel debate about whether policy makers need to start removing stimulus faster than anticipated. Highly unlikely at this stage, but worth monitoring.

The Chinese government has pledged more effective fiscal support for their economy and tighter supervision of overseas share listings as policy makers highlighted economic risks in the 2^nd half of this year. The US securities regulator has also increased disclosure requirements for IPOs of Chinese companies.

US President Biden and his administration will likely ramp up already very high levels of government stimulus as the US economic recovery begins to stall, with $10 trillion of new spending/investment planned. 10 million Americans remained unemployed with new obstacles emerging as some states reconsider mask mandates and other restrictions, all whilst many of the emergency stimulus programs from 2020 come to an end. The political cycle is clearly front and centre as the Biden administration looks to buy its way to a stronger rebound in light of the all-important US mid-terms next year.

A Hong Kong court sentenced the first person convicted under a national security law imposed by Beijing, to 9 years in prison. Doesn’t bode well for dozens of pro-democracy activists awaiting similar trials.

China’s government has quietly issued new procurement guidelines in May that require up to 100% of local content on hundreds of items, erecting fresh barriers for foreign suppliers, according to a number of sources. The government has not responded to queries on the document. The edict flies in the face of their admission to the WTO and their phase 1 trade deal with the USA. Hardly surprising.

YouTube suspended Sky News Australia from uploading content onto its website for a week under its “strikes” system. The Alphabet (Google) owned company said that the media company had breached its Covid-19 misinformation standards. Sky News Australia vehemently denies the allegations. In any case, a stain on censorship in Australia’s history.

A growth number of Australian government MPs are pushing back against the use of vaccine certificates for domestic travel and attendance at venues and events. It came after news the government had agreed on a passport system for international travel, but was facing internal unrest when it comes to domestic use.

Need help? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide. (02) 9683 2869. https://www.macarthurwealth.com.au

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US inflation highest in 40 years

Equity markets mixed as relief rally soured by US tech sell-off

Markets buoyed by US stimulus bills

A great way to help your kids – and you

Company reporting season buoys investor sentiment

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US inflation highest in 40 years

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Company reporting season buoys investor sentiment

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