After suffering one of the worst calendar years on record in 2022, global bond markets are having their best start to New Year in 3 decades, with the Bloomberg Global Aggregate index up 3.1% so far this month.
Australian Share Market (ASX 200) – up 3.07% – consecutively weekly gains on improving volume as market participants filter back to work. Consumer sentiment has also improved early in the New Year with ANZ-Roy Morgan Consumer Confidence index jumping by 6% and the highest in over three months in the first week of 2023. The Energy sector (+4.54%) led the gains followed by Materials (+3.81%) as China reopening momentum lifted demand for energy and commodities. Telecoms was the next best up 3.6% while Utilities (-0.73%) was the only sector lower in what was strong week for stocks. The Australian Bureau of Statistics has recently started releasing monthly inflation data, bringing us into line with other advanced economies.
While not a complete data set like the quarterly CPI data, it is a reasonable indicator and showed the inflation rate increasing by 7.3% for the year to December, a bit above estimates for a 7.2% increase, but up from 6.9% annual increase for November and back to the September high, which was the highest in 32 years. Our November retail sales data was also stronger than expected up 1.4% for the month vs consensus for a 0.6% rise. October’s result was also revised up sharply to a 0.4% rise from the initially reported surprise drop of 0.2%. That drop, which was revised to a gain, was being interpreted as a sign that retail spending could finally be cooling. Also in the ABS data was the quarterly jobs vacancies report which showed total job vacancies were 444,200 in November last year, a decrease of 4.9% from August and down further from the record 480,400 in May when the rate hikes began. Part of the “soft landing” narrative for the economy is for the number of vacant jobs, that are increasing competition in the labour market adding to upward wage pressures, to decline, while leaving actual jobs and employment intact. Some progress is being made here which would please the RBA. But the otherwise still strong labour market, and higher than expected retail sales and monthly inflation data last week has seen pricing move to a 90% chance of another 25-basis point rate hike when the Reserve Bank meets next month.
U.S. Share Market (S&P 500) – up 2.67%, with the Dow (+2.00%), and Nasdaq (+4.82%) also higher for the 2nd week in a row with investors returning to work in a better mood after the break and the outside chance of a soft landing for the U.S. economy gaining some traction early in the New Year.
Equity markets were higher on improving inflation readings last week as the December NY Fed consumer survey showed that median 1 year inflation expectations fell to 5.0% from 5.2% last month and the lowest level since July 2021. The data highlight for the week was headline CPI decreasing by 0.1% for the month in December, slightly lower than the no change expected and reversed November’s 0.1% monthly rise. Annual CPI was up 6.5% – the lowest since October 2021 – in line with forecasts and down from November’s 7.1% increase with the decline driven by lower energy prices during the month. There was still some pressure in the core with CPI ex food and energy up 0.3% for the month, an increase from November’s 0.2% rise but also in line with expectations with a 0.8% monthly rise in the sticky shelter component contributing to the rise.
The University of Michigan’s Consumer Sentiment report for January showed notable shift in early year sentiment with the index at 64.6, well ahead of estimates for 60.3 and the highest in nine months. The current conditions index was up a big 9.2 points on higher incomes and easing inflation. While investor and consumer sentiment has improved, the U.S. Q4 earnings season also got underway last week and will likely take over as the driver of equity markets over the next few weeks. After being slow to cut earnings estimates in the first half of last year, analysts have been quickly catching down to what the lower share prices of 2022 are implying. Consensus is currently for S&P 500 earnings to decline 4.1% year on year in Q4 which would be the first earnings contraction since Q3 of 2020. And according to FactSet’s Earnings Insight report, bottom-up estimates for Q4 S&P 500 EPS fell by 6.5% over the course of the quarter.
Microsoft (MSFT) reportedly looking at $10 billion investment in OpenAI. Microsoft plans to invest $10 billion in OpenAI, the start-up company behind popular artificial intelligence tool ChatGPT. The $10 billion investment would be part of a funding round that would value the company at around $29 billion. According to the report Microsoft will get a 75% share of OpenAI’s profits until it makes back the money on its investment, and then would assume a non-controlling 49% stake in OpenAI. The investment in ChatGPT would help Microsoft boost its web search engine, Bing browser, that only has a small share of the global search engine market that is dominated by Google.
Citigroup (C) reports slight miss on higher provisions – NIM and NII beat. The big US Banks got the Q4 reporting season underway on Friday night and although the sector initially sold off on the reports, managed to close higher as underlying revenue growth remained solid. Citigroup reported Q4 EPS of $1.10, a slight miss of the $1.14 estimate which was weighed down by a larger than expected Provision for credit losses of $1.85B vs. $1.79B expected. Revenue of $18.01B was in line while Net Interest Income of $13.27B beat the $12.67B estimates on a higher Net Interest Margin of 2.39% vs 2.33% expected. CEO Jane Fraser: “With their revenues up 32%, Services delivered another excellent quarter, and we have gained significant share in both Treasury and Trade Solutions and Securities Services. Markets had the best Q4 in recent memory, driven by a 31% increase in Fixed Income, while Banking and Wealth Management were impacted by the same market conditions they faced throughout the year. Our cards businesses had double-digit revenue growth for the second straight quarter, and we continue to make progress on our international consumer exits, closing five sales to date.”
Bank of America (BAC) beats estimates, CEO expecting mild recession this year. Bank of America reported Q4 EPS of $0.85, ahead of the $0.77 expected. Net revenue of $24.53B beat the $24.17B estimate although Net Interest Income of $14.80B was largely in line with the $14.92B estimate. The Net Interest Margin of 2.22% was also largely in line with estimates. Provision for credit losses of $1.1B increased by $1.6B from the year ago period and is key source of earnings volatility for Banks (here and abroad) in recent years. Big provisions were taken during the pandemic that were not required so were written back, are now increasing again on the increased recession risks. CEO Brian Moynihan said “We ended the year on a strong note growing earnings year over year in the 4th quarter in an increasingly slowing economic environment. The themes in the quarter have been consistent all year as organic growth and rates helped deliver the value of our deposit franchise. That coupled with expense management helped drive operating leverage for the sixth consecutive quarter”. He also stated he expects a mild recession this year, which has now firmed as the base case amongst the large U.S. Bank CEO’s.
The Week Ahead
Domestic economic data releases this week includes Consumer Inflation Expectations and the key Employment data on Thursday. Estimates are for another 22.5K jobs added last month, down from November’s much higher than expected 64K jobs increase with the unemployment rate to hold steady at the 48 year low of 3.4%.
Internationally, Chinese Q4 GDP, Industrial Output and Retail Sales are tomorrow, as is U.K. Employment data and the German ZEW Economic Sentiment Index. Wednesday is the U.S. Empire State Index, Japan Industrial Production, and U.K. Inflation data (CPI and PPI). Thursday has U.S. PPI, Retail Sales, Capacity Utilization, Industrial Production, Business Inventories, and the NAHB Housing Market Index. Friday is U.S. Building Permits, Housing Starts and Philadelphia Fed Index. Along with Japan CPI and UK Retail Sales.
Corporate reporting this week includes quarterly sales and activity reports from BHP (BHP) and Santos (STO) on Thursday.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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