The issue of the US debt ceiling has garnered much interest in recent weeks, with expectations that it would hit this debt limit by next week, in the absence of a deal to extend it. The US first instituted a statutory debt limit in 1917. Since 1960, Congress has agreed to raise, extend, or change the definition of the debt limit on 78 separate occasions.
Australian Share Market (ASX 200) – down 1.71% snapping a 2-week winning streak. The Info Tech sector (+4.73%) led the gains again followed by Energy (+1.09%) and Utilities (+0.21%) the only sectors higher. Materials (-3.52%) led the declines followed by Consumer Discretionary (-3.21%) and Consumer Staples (-1.93%). Debt ceiling concerns in the U.S dominated the week and weighed on equities as negotiations between Republicans and Democrats continued before an in-principal agreement was reached over the weekend. The deal raises the debt ceiling by roughly $4 trillion for two years, includes a rollback of non-defence discretionary spending to FY2022 levels, while capping top line federal spending to 1% annual growth for six years and will be voted on by the House and Senate this week. The surprise RBA rate hike earlier this month hit consumer sentiment but there are few signs of any impact on the housing market with auction clearance rates last weekend the highest since February 2022 according to CoreLogic with Sydney and Melbourne clearance rates of 78.2% and 74.4% respectively. Inflation pressures persist according to UBS’ latest Food & Beverage price tracking data which showed food inflation rose to 9.6% for the year in April from 9.4% in March driven by fresh food price rises accelerating to 9.9%. Aussie retail sales were flat in April, missing consensus for +0.3% increase and down from +0.4% in March. Sales of $35.26 billion were still up 4.2% from a year earlier but slowing from the 5.4% annual growth rate last month. Shoppers spent more on winter clothes and in department stores but cut back on spending on food and dining out. According to the Australian Bureau of Statistics report “Retail turnover has plateaued over the last six months as consumers spent less on discretionary goods in response to cost-of-living pressures and rising interest rates”. The slowdown in consumer spending is evidence the 375 basis points in rate hikes over the past 12 month is having the desired effect with markets currently expecting the RBA will hold rates steady at their meeting next week.
U.S. Share Market (S&P 500) – up 0.32%, with the Dow (-1.00%) and the Nasdaq (+2.51%) mixed with the year-to-date divergence between the Nasdaq and Dow amongst the widest on record (Dow down 0.16% year to date vs. Nasdaq up 24%). Data was O.K with the flash PMIs for May last week showing manufacturing struggling, falling more than expected and back into contraction territory in line with other recent manufacturing surveys. But the services PMI was better than expected and the highest print in 13 months and Durable goods orders also rose more than expected so still areas of strength in the U.S economy. There were several Fed speakers last week pushing the higher for longer narrative on rates but with several coming round to the idea of a pause next month with Minneapolis Fed President Kashkari (voter) saying he was open to moving more slowly from here. But also pushed back on the idea that the rate hike cycle is over, saying that a pause is very different from saying that the Fed is done. The May FOMC meeting minutes were the highlight and showed members increasingly split on the need for further rate hikes, emphasising the need to maintain optionality going forward in signs they could adopt a neutral stance signalling that either decreases, or further increases had not been ruled out. Members continued to expect a mild recession starting later this year and for a slow return to 2% inflation. Market pricing for another 25-basis point hike next month remained low but the December median Fed funds rate increased as Markets pushed out some of expected year-end rate cuts. The PCE inflation data (the Fed’s preferred measure) on Friday night was higher than expected. The April PCE deflator increased 0.4% for the month, for an annual 4.4% increase. Core PCE was up 0.4% for the month with annualized Core PCE up 4.7%, with all measures slightly above estimates. Personal spending was much stronger than expected, consistent with the some of the big U.S retailers who reported that consumers were holding up relatively well during their Q1 earnings releases last week.
Apple (AAPL) announced a multibillion-dollar deal with Broadcom last week to develop 5G radio frequency components in the U.S. The 5G radio components will include FBAR filters and other wireless connectivity components with Apple saying the deal is part of its 2021 commitment to invest $430 billion in the U.S. economy. FBAR (Film Bulk Acoustic Resonator) filters are a form of bulk acoustic wave (BAW) filter that have superior performance with steeper rejection curves compared to surface acoustic wave (SAW) filters. The deal will allow Apple it to invest in “critical automation projects and upskilling” with engineers and other technicians with Apple CEO Tim Cook adding “We’re thrilled to make commitments that harness the ingenuity, creativity, and innovative spirit of American manufacturing,”
Novo Nordisk (NOVO) announced results from their OASIS 1, phase 3a trial last week. OASIS 1 is a 68-week, efficacy and safety trial comparing once-daily oral semaglutide 50 mg for weight management to placebo in 667 adults with obesity or overweight with one or more comorbidities. The trial achieved its primary endpoint by demonstrating a statistically significant and superior weight loss at week 68 with oral semaglutide 50 mg versus placebo. The trail showed that if all people adhered to treatment from a mean baseline body weight of 105.4 kg, people treated with oral semaglutide 50 mg achieved a statistically significant weight loss of 17.4% after 68 weeks compared to a 1.8% reduction with placebo. Novo Nordisk now expects to file for regulatory approval in the US and the EU this year with the global launch of oral semaglutide 50 mg contingent on portfolio prioritisations and manufacturing capacity.
Woolworths (WOW) announced last week they have acquired the grocery delivery service Milkrun which had closed its doors last month. Woolworths will fold Milkrun into their existing grocery delivery service, Metro60, which was originally designed to fulfill grocery orders in under 60 minutes. Milkrun pioneered rapid grocery delivery in Australia and will look to improve Woolworths delivery times for Metro orders down to an average 33 minutes. Everyday Rewards customers will also earn points under the Metro60 refresh.
The Week Ahead
Domestic economic data releases this week include Building Approvals tomorrow, the monthly CPI report and Private Sector Credit on Wednesday and Housing Finance on Friday. We also get some Q1 GDP components this week with Construction Work done on Wednesday and Capital Expenditure on Thursday.
International highlights include Eurozone Business and Economic Confidence and U.S Consumer Confidence tonight. China Manufacturing data is Wednesday with a raft of Eurozone country CPI and Q1 GDP figures Wednesday night. Also Wednesday night is U.S Chicago PMI, the JOLTS Job Openings report, and several Federal Reserve speakers. Thursday night sees Eurozone CPI and Unemployment Rate. Friday night is U.S Construction Spending and the highlight of the week which is the May Nonfarm Payrolls report where another 175K jobs gain is expected and the Unemployment Rate to increase from 3.4% to 3.5%.
Corporate reporting is quiet this week with just an Annual General Meeting for Google parent, Alphabet on Friday.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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