Investment markets and key developments: short-term outlook for ‘still messy’ stocks

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It’s been a choppy week for the markets after the US Federal Reserve raised interest rates by 0.5% at its board meeting in May.

This outcome was expected by the market and economists and the market actually rose on comments from Fed Chairman Powell that rate hikes of 0.75% were “not something the committee is actively considering,” alleviating fears of an extremely aggressive short-term rate hike profile from the Fed. The market has pushed back on US interest rate hikes over the next 1-2 years, with US interest rates now set to hit close to 4% in a year that looks too high (we think rates will peak closer to 3%).

The initial post-Fed rally was more than reversed the next day, with U.S. stocks still up 0.4% on the week, but around 10% below their March peak (the tech-heavy NASDAQ fell). shooting even worse, down 22% since its start -2022 maximum). Australian equities are down 3.4% over the week, but have outperformed in recent months against their global counterparts due to our lower relative weighting in technology and high exposure to commodities .

Globally, Eurozone stocks were down 2.8% this week, Japanese stocks were down 0.2% (although markets were mostly closed this week for the holiday National Golden Week) and Chinese stocks were down 0.7% (although markets were also mostly closed due to the Labor Day holiday).

In the near term, the outlook for equities is still messy and there could be more downside as markets worry about a major economic slowdown or “hard landing” and aggressive interest rate hikes , but signs of spike in US inflation and strong market economic fundamentals, high accumulated savings) should be positive for equities over a 6-12 month horizon.

US 10-year bond yields rose more than 3% this week, with Australian 10-year yields also above 3%. The AUD rose to $0.71 and many commodity prices rose again. Oil prices are back around $110 a barrel after the EU confirmed it will ban Russian oil imports over the next 6 months and gas prices have also risen.

The March quarter US earnings season is almost over with 87% of companies reporting. Earnings growth is robust, with results around 78.8% ahead of expectations. Annual earnings growth was 10.6% for the year. Strong earnings explain companies’ ability to pass on higher prices to consumers.

Source: Markit, AMP

Most of the April manufacturing and global services PMIs have now been released and show some moderation in global manufacturing momentum (see chart below), although activity is still positive and moderating from lows very high.

Source: Markit, AMP
Source: Markit, AMP

Services activity also slowed slightly in April, with declines in the United States and China. As China’s Covid lockdowns disrupt global supply chains, the impact on economic activity is arguably more subdued than in the past, with PMIs in most countries not registering sharp declines despite the reliance on Chinese manufacturing. This could suggest the world is becoming more immune to China-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 problems in China – although there is still a long way to go to get back to “normal”.

Source: Markit, AMP
Source: Markit, AMP

Our own pipeline inflation pressure gauge continues to moderate (see chart below), which includes things like commodity prices, shipping costs and delivery times.

Source: Bloomberg, AMP
Source: Bloomberg, AMP

What to watch next week?

In the United States, the April nonfarm payrolls (released Friday) are expected to post another strong employment report of 385,000 (down from the March figure of 431,000), with the unemployment rate falling further to 3.5% and average hourly earnings growth slowing to 5.5. % over the year (from 5.6% in March). Consumer price data for April (released Wednesday) will show a weaker rise in overall prices (consensus expects a rise of 0.2% vs. 1.2% the previous month) as prices Commodities have cooled off March highs (although still elevated). Underlying consumer prices are expected to rise 0.4%, which is solid but less than the December/January spikes. Producer price data also released next week is expected to rise 0.5% in April. The University of Michigan consumer sentiment survey is expected to show another weak reading, around its lowest level since late 2011.

The Australian data includes March quarter retail sales volume data which we expect will show a 1.1% increase, making a small contribution to March quarter GDP growth. NAB’s April Business Survey may show some weakening in business confidence and conditions due to uncertainty over rate hikes and global inflation concerns, despite positive results by businesses in recent months. On the other hand, consumer confidence has weakened and there will be an update on consumer sentiment in Wednesday’s release.

In the rest of the world, it is a quiet week. European data includes May’s ZEW survey of the outlook for financial market participants, which fell to its lowest level since the start of the pandemic in 2020. March industrial production data is also released.

In the UK, preliminary March quarter GDP is out and is expected to show some slowdown from last quarter’s 1.3% pace.

In Canada, the April unemployment rate is expected to ease slightly to 5.2% from 5.3% last month with another impression of decent jobs.

And in China, the April trade surplus is expected to widen to around US$48.4 billion. Export growth is expected to pick up during the year, but imports are expected to decline slightly due to weaker domestic demand related to lockdowns. April consumer and producer price data is expected to show consumer prices rising 1.9% on the year (vs. 1.5% last month) and 7.5% for the year. producers (lower than 8.3% last month), but this is well below current price growth. in global counterparts.

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