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From their June lows, global and Australian equities have run hard and are vulnerable to a pullback over the next few months.
On the positive side of the equation:
Increasing signs of a peak in US inflation;
20% or so falls in share markets possibly having already anticipated a mild recession; and
The strength of the rebound itself maintains the possibility that we may have seen the bear market low and that any pullback may just be a partial retracement of the rally since mid-June which then bottoms out above the June low and sees the rising trend continue.
Time will tell. On a 12-month view, shares are likely to be stronger as central banks stop hiking rates and recession outcomes decrease. But short-term uncertainty is very high and the risks are on the downside.
While we lean to the RBA hiking by another 0.5% next month, we think it’s a close call as to whether they hike by 0.25%. Given the lags involved in how monetary policy impacts the economy – many households have not seen the full impact of the rate hikes so far and the fixed rate cliff is yet to impact mostly next year – and the huge blow to real wages, it makes sense for the RBA to slow the pace of tightening to give time to assess the impact of the rate hikes so far.
With medium-term inflation expectations remaining low the RBA now has some scope to slow down. Moving by 0.4% might be a good compromise (and return the cash rate to a more “normal” number). The futures market is currently pricing in a 0.38% hike in September. We still see the peak in the cash rate being 2.6% later this year or early next.
Our Australian Economic Activity Tracker fell again over the last week and continues the loss of momentum seen since April, consistent with a slowdown in growth. Our US Tracker rose slightly and our European Tracker fell slightly.
Based on weekly data for eg job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP
We continue to expect a pick-up in wages growth going forward as:
As a result, we see wages growth picking up into the 3’s over the next year. This will still be well below the sort of wages growth being seen already in the US and Europe suggesting a wage-price spiral is a far smaller risk in Australia, meaning the RBA won’t have to raise rates as much as the Fed.
Source: ABS, AMP
The Australian June half earnings reporting season has now seen about 65% of company profits by market capitalisation report. Overall results are a bit soft, and they have slowed down since the initial recovery from the pandemic lockdowns.
So far only 33% of results have surprised on the upside, 58% have seen earnings up on a year ago and 52% have increased dividends, all of which are below average reflecting the cost pressures some businesses are facing. Reflecting this, only 45% of companies saw their share prices outperform the market on the day results were released which is well below the norm of 54%. A significant proportion of companies have flagged earnings growth this year below inflation.
Business conditions PMIs for August for the US, Europe, Japan and Australia will be released on Tuesday and will likely show further signs of a slowdown. Hopefully, pricing pressures, supplier delivery lags and work backlogs with have improved further adding to signs of a peak in inflation pressure.
The annual central bankers’ gathering in Jackson Hole, Wyoming (Thursday to Saturday) where the topic is 'Reassessing Constraints on the Economy and Policy' will be watched closely for any change in direction regarding global monetary policy – but its likely central bankers, including Fed Chair Powell, will remain hawkish in dealing with inflation albeit with a bit of caution creeping in given the emerging economic downturn.
In the US, core private final consumption deflator inflation for August (Friday) will likely show a 0.3%mom rise with annual inflation remaining unchanged at 4.8%yoy adding to signs that inflation may have peaked. Personal spending and income are likely to show continued modest growth. Durable goods orders for July (Wednesday) will likely show a further rise and home sales data (Tuesday and Wednesday) is likely to remain soft.
The June half Australian earnings reporting season will hit its busiest week with about 100 major companies due to report. Consensus expectations are for about 20% earnings growth for the 2021-22 financial year with this boosted by energy earnings (+275%) and industrials averaging about 9.5% growth. The focus will likely be on outlook statements given cost pressures, labour shortages and slowing consumer demand.
All prices and analysis at 22 August 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.