Stock markets were mostly up over the past week, with the US rising 2.1%, Australia +0.7%, Japan +2.1% and China +2.3 %. The exception was in the Eurozone where stocks fell 0.9%.
After global equity markets rallied sharply from mid-June to August on expectations of a ‘central bank pivot’ following aggressive rate hikes, stocks have been trending lower ever since. , as central banks remained hawkish and economic data was strong (meaning more rate hikes are needed to reduce demand).
Markets’ rise this week likely reflects some recent oversold conditions in equities, but creates a new “higher low” for equities (after the June low) that could see a setup for a rebound in equities from from here (as US equities are still 16% below early 2022 highs and Australia is 9% below its 2022 high).
However, with central banks remaining hawkish (the RBA, ECB and BoC all hiked rates this week) and no definitive sign of an inflation spike, we remain cautious on the short-term outlook for equities. .
By interest, 94% of central banks in developed markets raised interest rates (see chart below).
Bond yields rose in the US and Europe on expectation of further rate hikes. The US 10-year rate rose to 3.3% (from 3.1% last week) and the German 10-year rate rose to 1.7% from 1.5%. In Australia, the 10-year yield fell slightly to 3.6% after hitting 3.7% this week following Lowe’s speech that hinted at a slowing pace of rate hikes.
Reports that new UK Prime Minister Liz Truss was planning a fiscal stimulus package that would add to the UK budget also added upward pressure on UK yields. Bloomberg indicated that the total stimulus (which would be targeted at households and help them pay their energy bills) could amount to up to 9% of GDP. The problem is that while, in the short term, this would solve cost-of-living issues and help the economy avoid a recession, it could also boost household income and risk entrenching higher inflation for longer. Thus, measures of the cost of living for households should be accompanied by fiscal tightening in other areas.
Energy prices fell during the week despite the announcement that the gas pipeline between Russia and Europe Nordstream 1 would remain closed (after being closed for maintenance) unless sanctions against Russia are lifted. cancelled. Many European countries now offer energy price caps, consumer rebates or cost-of-living assistance payments. Oil is down to $83 a barrel and most commodities (except gas and coal) are down from 2022 highs (see chart below).
The US dollar hit a cyclical high this week before giving up some of those gains. Weakness in the Yen (as the BoJ pursues loose monetary settings) and the Euro (due to growing concerns over the energy crisis) provided a bullish boost to the USD. The AUD rallied slightly to USD 0.68.
Monitoring of economic activity
Our indicators for monitoring economic activity improved for Australia (thanks to higher hotel and restaurant bookings), weakened in the United States (thanks to lower rail freight, employment and mortgage applications) and increased slightly in Europe (thanks to increased mobility in retail and leisure). Economic activity still appears to be holding up in the three major economies.
Australian economic events and implications
Australia’s June quarter GDP rose 0.9% (as expected by economists and the RBA), a solid increase, taking annual growth to 3.6%. GDP growth was expected to be decent in the first half of 2022 as consumer spending on services normalizes as the travel and service industries fully open up, reflected in the data. June GDP is retrospective as it does not really reflect the impacts of the RBA rate hikes (which started in May). We expect GDP growth to slow to less than 2% per year by the end of 2023.
Australia’s July trade data was much weaker than expected, with the trade balance falling to $8.7 billion, with the consensus looking for a trade balance of $14.7 billion. Exports fell 9.9% on a sharp drop in iron ore and coal exports as prices fell. Exports of non-monetary gold also declined. Imports increased by 5.2% with a strong increase in consumer goods (which is a sign that consumer demand is holding up but would also reflect higher prices for goods).
Other Australian data this week included the Melbourne Institute’s Monthly Inflation Gauge which showed the reduced average inflation measure stood at 5.3% year on year in August, indicating further growth in the September Quarter Core Inflation (see chart below) and a solid 2% increase ANZ Jobs Announcements for August.