Investment markets and key developments: why the short-term outlook for shares is "still messy"
It was a turbulent week for markets after the US Federal Reserve raised interest rates by 0.5% at its May board meeting.
This outcome was expected by the market and economists and the market actually rose from comments by Fed Chair Powell that 0.75% rate rises were “not something that the committee is actively considering” which alleviated fears of an extremely aggressive short-term rate hike profile from the Fed. The market pushed out US interest rate hikes further over the next 1-2 years, with US interest rates now expected to reach close to 4% in a year which looks too elevated (we think rates will peak closer to 3%).
The initial post-Fed rally was more than reversed the next day, with US shares still 0.4% higher over the week but about 10% below their March peak (with the tech-heavy NASDAQ faring even worse, down by 22% since its early-2022 high). Australian shares are 3.4% lower over the week but have outperformed over the past few months compared to global counterparts because of our lower relative tech weighting and high commodities exposure.
Globally, Eurozone shares were 2.8% lower this week, Japanese shares were 0.2% weaker (although markets were mostly closed this week for the national holiday of Golden Week) and Chinese shares were down by 0.7% (although markets were also mostly closed because of the Labor Day public holiday).
In the short-term, the outlook for shares is still messy and there may be more downside as markets worry about a significant economic slowdown or “hard landing” and aggressive interest rate hikes but signs of US inflation peaking and solid economic fundamentals (strong labour market, high accumulated savings) should be positive for shares on a 6-12 month view.
US 10-year bond yields rose over 3% this week, with Australian 10-year yields also breaking out over 3%. The AUD rose to 0.71 USD and many commodity prices rose again. Oil prices are back around $110/barrel after the EU confirmed that it would move to ban Russian oil imports over the next 6 months and gas prices also moved higher.
US March quarter earnings season is nearly complete with 87% of companies having reported. Earnings growth is robust, with about 78.8% of results beating expectations. Annual earnings growth is running at 10.6% over the year. Solid earnings outcome explains the ability of companies to pass through higher prices to consumers.
Source: Markit, AMP
Most global April manufacturing and services PMI’s have now been released and show some slowing in global manufacturing momentum (see chart below), although activity is still positive and is moderating from very high levels.
Source: Markit, AMP
Services activity also slowed a little in April, with a fall in the US and China. While China’s Covid lockdowns are causing some disruption to global supply chains, the impact on economic activity is arguably more muted compared to the past, with PMI’s in most countries not showing big falls despite the reliance on Chinese manufacturing. This could suggest that the world is becoming more immune to Chinese-related Covid disruptions. This would be good news for long-term supply issues and related inflation.
Supplier delivery times in the PMI data are also slowly improving despite the issues in China – although still have a long way to go to get back to “normal”.