Global bond yields as measured by the Bloomberg Global Aggregate Treasuries Total Return Index, hit 3.26% last week, the highest yield in 15 years.
Australian Share Market (ASX 200) – down 2.24% to a new 3 month low as bond yields rose. Offshore leads were weak, and sector declines were broad based led by Info Tech (-3.81%) Health Care (-3.4%) and Consumer Discretionary (-3.1%) with Utilities (+0.62%) the only sector higher. Ongoing stronger than expected economic data saw bond yields continue to move higher last week, pressuring equity valuations. The US 10 yr. treasury yield rose to an 8-month high of 4.07% while our 10 yr. government bond yield rose to 4.25%, the highest since 2013. Aussie house prices rose again according to CoreLogic with their national home values index up another 1.1% in June. In the country’s largest residential property market, the 1.7% monthly increase took Sydney’s price rises from the January low point to 6.7%. Home lending and building approval figures jumped in May, posting monthly gains of 4.8% and 20.6% respectively, and the RBA left the cash rate unchanged at 4.10% in a close call with a fairly muted equity market response that was likely due to another hawkish policy statement. They maintained the tightening bias with inflation still too high and the economy facing risks of a wage-price spiral. They repeated some further tightening may be required to ensure inflation returns to target and the decision to hold was to provide more time to assess the lagged effect of rate hikes, state of the economy and economic outlook. Although they did note the recent fall in headline inflation, slowing household spending and pressure on household finances. No doubt the RBA is also watching the Insolvency data released by ASIC which showed all industries insolvencies are almost back to pre-pandemic levels. Although, insolvencies across the construction and manufacturing industries reached the highest since 2014 and over the past twelve months, 2,175 construction companies have gone into external administration, the highest 12-month period on record. Separately Roy Morgan research estimated 28.8% of mortgage holders are currently under stress, the highest since the financial crisis in May 2008. With the financial year just ended, equity investors are now looking to the full year reporting season next month to see how earnings and dividends are holding up.
U.S. Share Market (S&P 500) – down 1.16% with the Dow (-1.96%) and Nasdaq (-0.92%) also lower during the Independence Day holiday shortened week. U.S equity markets were lower to start July after a big move up in June and the fourth monthly gain in a row for the S&P 500. The June FOMC meeting minutes were out, but no surprises with the minutes largely reflecting the policy statement and Chair Powell’s post-meeting remarks at the time. The ISM Manufacturing index for June fell more than expected. It was the eighth-straight month in contraction territory and the lowest since May 2020 with manufacturing the clear weak outlier. Other stronger than expected data saw bond yields rise. The June ISM Services index rose more than expected to the highest since February. It was the sixth-straight month in expansion territory with the Business activity index surging by 15% for the month. And it was a big week for employment data with the ADP June private payrolls report rising by 497K jobs, double the 250K expected and the biggest monthly gain since February 2022. The May JOLTS report showed job openings at 9.8M, in line with estimates and still at historically high levels. And June nonfarm payrolls increased by 209K on Friday night, still a strong number but slightly below expectations for 225K and was the first time in 15 months that the headline number had missed estimates. The unemployment rate ticked down to 3.6% from 3.7% as expected and remains historically low. After the historic declines in Government Bond markets last year as inflation and interest rates took off, the consensus view amongst Fixed Income strategists in 2023 has been to add duration back into Fixed Income portfolios – a call that is looking a little premature the last few weeks. Focus will now shift to the Q2 earnings season set begin later this week. Estimates are for S&P 500 earnings to decline 6.8% in Q2 from the year ago period. Q2 is also expected to be the earnings trough with earnings growth of 0.4% expected in Q3, and earnings growth of 7.9% expected in Q4.
Bank of America (BAC) announced they will increase their dividend by 9% to $0.24 per share from $0.22 in Q3 after passing of the Dodd-Frank Act supervisory severely adverse stress test results last week. The company mentioned that it had initiated a dialogue with the Federal Reserve to understand some differences between the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) results and Bank of America’s Dodd-Frank Act stress test results after the central bank’s annual stress tests projected more favourable results than what Bank of America is projecting. Those discussions are ongoing and could see a further increase in the dividend.
Telstra (TLS) announced they are to sell broadband and voice services for rural and remote customers powered by Starlink. Starlink is a satellite internet constellation operated by American aerospace company SpaceX, providing satellite Internet access. CEO Vicki Brady said Telstra is “the first provider in the world” to have signed such an agreement, and that it would offer services to both consumer and business customers. Adding they have been testing and trialling low earth orbit (LEO) satellite technology in preparation. Currently Starlink customers deal directly with Starlink and either do their own setup or engage an installer to do it for them with Telstra hoping that a “professional install option and the ability to get local help with your setup” will be key value-adds.
Thermo Fisher Scientific (TMO) announced last week they will acquire CorEvitas, a leading provider of regulatory-grade, real-world evidence for approved medical treatments and therapies, from Audax Private Equity for $912.5 million in cash. CorEvitas has approximately 300 employees and is well positioned to grow its revenue organically in the low double digits, with expected revenue of $110 million in 2023. “The addition of CorEvitas will further advance our capabilities to better serve our pharma and biotech customers and strengthen our value proposition. CorEvitas is an excellent strategic fit for Thermo Fisher and highly complementary to PPD, our leading clinical research business,” said Marc N. Casper CEO of Thermo Fisher.
The Week Ahead
Domestic economic highlights this week include Westpac Consumer and NAB Business Confidence tomorrow and Consumer Inflation Expectations on Thursday.
International highlights include China Loan Growth, CPI and PPI today with U.S Consumer Credit tonight. U.K unemployment is tomorrow along with German ZEW Economic Sentiment and U.S NFIB Small Business Index. The highlight of the week is U.S CPI on Wednesday night with the annual headline rate expected to fall to 3.1% as we cycle peak base effects (U.S CPI peaked at 9.1% in June last year). China Trade Balance is Thursday along with U.K Manufacturing and Industrial Production and Eurozone Industrial Production. U.S PPI and Treasury Budget is Thursday night with the University of Michigan Consumer Sentiment Friday night.
Corporate reporting starts to ramp up with the U.S Q2 earnings season with Q2 results from Citigroup on Friday night.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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