According to Citi research global consumers of commodities will pay producers around $6.3 trillion more in 2022 than they did in 2019 pre pandemic. Which, for perspective, is an increase of around 6.2% of world GDP.
Australian Share Market (ASX200) – down 4.2% and ending a 3 week winning streak as the Reserve Bank of Australia hiked rates more than expected and offshore leads were negative. The Energy sector (+4.97%) led the gains as the oil price made a new 3 month high with Utilities (+0.46%) the only other sector higher while Healthcare (-0.17%) fell the least. Financials (-9.01%) led the declines with the Banks particularly hard hit as were REITs (-7.58%) following the slightly larger than expected rate hike with Info Tech (-4.81%) the next worst as bond yields spiked again on the hawkish RBA commentary. The RBA hiked the cash rate by 50 basis points to 0.85% which was slightly larger than the 0.40% expected. It was also the biggest interest rate hike in 22 years. But it was the RBA’s commentary noting inflation has increased significantly and is expected to rise further that seemed to rattle investors. They also mentioned the recent spike in domestic gas and electricity prices means that inflation is likely to be higher than they expected just a month ago and reiterated their commitment to doing what is necessary to get inflation back to towards the target over time with a steep path of interest rate hikes expected over the next few months. The new Federal government was under some early pressure over the emerging east coast energy crisis, that is feeding into the higher inflation as wholesale energy prices surged in recent weeks but said there isn’t a lot they can do in the short term. Almost a quarter of Australian coal capacity is currently offline after various outages at major plants. The coal fired energy shortage is compounding the gas shortage with supply failing to keep up with a surge in winter demand and renewables unable to fill the gap in the short term.
US Share Market (S&P 500) – down 5.05%, with the Dow (-4.58%) and Nasdaq (-5.06%) all lower for the 2nd week in a row. US equity markets had been consolidating the late May rally and volatility had fallen to a 6 week low early in the week. But as energy prices continued to rise, investors started 2nd guessing the peak inflation narrative with stocks selling off ahead of Friday nights inflation data which came in at 8.6%, the largest year on year increase since December 1981 and was well ahead of the 8.2% expected with the unexpected increase sending stocks lower again to close the week on the lows. Focus now shifts the US Federal Reserve meeting this week with some pundits now forecasting a 75 basis point hike, up from the 50 basis points expected last week following the higher than expected inflation reading. There was also some unexpected weakness in the high frequency data that is also raising some questions on the robustness of the US economy under the high inflation with the weekly jobless claims unexpectedly increasing to a 5 month high last week. For perspective though this is coming off a 52 year low but could be an early signal the very strong employment situation (unemployment at just 3.6% last month) could be as good as it gets. The University of Michigan’s consumer sentiment index also slumped to an unexpected all time low on Friday night (records began in 1980) of 50.2 down from 58.4 the prior month and well below the 58.1 expected capping off what ended up being a poor week for investor sentiment. Every sector was lower for the week although Energy (-0.92%), Consumer Staples (-2.61%) and Healthcare (3.40%) fell the least. The declines we led by Financials (-6.77%), Info Tech (-6.38%) and REITs (-6.10%).
National Australia Bank (NAB) to issue a new hybrid security including rollover offer for NABPD noteholders. NAB announced last week they are issuing a new hybrid security, NAB Capital Notes 6, to raise $1 bill (more or less) with the net proceeds to be used for general corporate purposes and the new securities qualifying as Additional Tier 1 Capital for the purposes of regulatory capital requirements. This is the first Bank Hybrid to come to market since the ructions in credit markets the past few months with the margin (to be determined under the bookbuild) expected to be in the range of 3.15% 3.35%. These are the highest issue margins we have seen for a while and combined with the spike in the 90 day bank bill swap (reference) rate to 1.6% from 0.1% at the end of 2021 the returns for income investors are continuing to improve.
Amazon (AMZN) completes 20 for 1 stock split. Amazon’s 20 for 1 stock split announced in March went into effect last week so Advisers and clients will be seeing a larger number of AMZN shares in client accounts. The last time Amazon split its stock was back in 1999 during the dot com bubble. Stock splits don’t change the value of a the company or the value of shareholders investment in the company but can create more demand from retail customers and increases liquidity as the stock has a lower dollar value. Is easier to buy 20 AMZN shares at $120 per share than 1 shares at $2,400 per share for example although the value of the holding is the same.
Telstra (TLS) raising mobile phone charges by 4-5%. Telstra announced last week it will be increasing customers monthly mobile bills by 4 to 5% from July as part of a new inflation based yearly pricing review. Telstra informed users of the price hikes which include $3 on top of its $55 monthly basic and $65 essential monthly plans, and a $4 upgrade to its $85 premium tier plans. “Like any business, we have inflation pressures and an annual CPI aligned increase allows us to keep up with the latest economic environment, so we can continue to focus on the things that matter, like bringing our customers Australia’s best mobile network.” A spokesperson said. Companies with inflation linked revenue can be good in the current environment in terms of helping to protect margins from higher input prices although the price increases do increase the risk of customer churn were competitors like Optus not to follow suit.
The Week Ahead
Domestic data this shortened week includes NAB business confidence and quarterly house price index today, with consumer inflation expectations and labour force data on Thursday. The unemployment rate is expected to fall to 3.8%, a new 50 year low and down from the 3.9% unemployment rate last month.
Internationally we have inflation data remaining front and centre with US PPI tonight and final Eurozone CPI data during the week. The German ZEW economic sentiment data tonight will be closely watched for any improvement there, US retail sales and Eurozone industrial production are the highlights tomorrow night. The highlight of the week is the US FOMC meeting Thursday morning where markets are split between an expected 50 basis point rate hike or a higher 75 basis point hike following the higher than expected inflation data on Friday. The UK’s bank of England also meets to set monetary policy Thursday night. The Bank of Japan meets on Friday along with US industrial production and capacity utilization.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.