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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.

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