Market Movements

A flat index hiding a sharp rotation

The Australian market finished the week almost exactly where it started, with the All Ordinaries up 0.3%. That calm surface is misleading. Resources rose 2.1% and the broader materials sector 2.5%, while at the other end telecommunications fell 2.2%, listed property 1.9% and consumer discretionary 1.7%. The dividing line for markets was interest rates: anything valued on long-dated cash flows or carrying debt was sold, and anything with a commodity price attached was bought. Consumer staples added 1.8% and healthcare 1.1%. Smaller companies did not enjoy the week, with the Small Ordinaries down 1.1% against a gain of 1.2% for the microcap end of the market.

JB Hi-Fi fell 15.3% despite record sales of A$11.06 billion and a 22.5% lift in the full-year dividend. The problem was the trading update. Comparable sales in July were negative. As a bellwether for discretionary retail, it is a useful read on the household sector — and an uncomfortable one in a week when inflation surprised on the upside.

Inflation surprises and the RBA is live again

Wednesday’s inflation figures were the week. The July CPI rose 1.0% in the month in original terms against expectations of 0.8%, one of the larger monthly increases since the ABS began publishing a complete monthly series. Seasonally adjusted, which strips out the predictable July effects, the rise was a milder 0.6%. Petrol did most of the damage, up 7.5% in the month as the federal fuel excise relief unwound, alongside domestic holiday travel up 6.2% over the school holidays and clothing and footwear up 2.6%.

The annual rate actually fell, to 3.5% from 3.8%, but only because July last year was a bigger month still. The measure the Reserve Bank watches most closely is the trimmed mean, which discards the largest price rises and falls at either end of the basket to give a cleaner read on underlying inflation. It rose 0.5% in the month against 0.3% expected and sits at 3.6% over the year, unchanged and above the RBA’s 2–3% target band, where it has now been for more than a year.

Bond markets moved quickly. Pricing for a rate rise at the September meeting jumped from roughly 17% before the release to about even money after it, and a November move is now fully priced. The two-year yield rose 2.1% to 4.69% and the ten-year 1.0% to 5.08%, close to a fifteen-year high. The cash rate itself remains at 4.35%, held at the August meeting after three increases earlier this year. One detail worth noting is that ten-year breakeven inflation, the rate of inflation the bond market expects on average over the next decade, actually fell 2.1% to 2.11% on the week. The market read a hot print not as a sign that inflation is getting away, but as confirmation that the RBA will do something about it.

Overseas

American markets were firmer, with the S&P 500 up 0.5% and the Nasdaq 0.9%, both helped by Nvidia’s result on Wednesday night. Information technology led global sectors with a gain of 1.7%, followed by communication services at 1.3% and financials at 1.0%. Energy was the clear laggard, down 2.4% as the oil price fell. Industrials slipped 0.8% and healthcare 0.7%.

Japan was the strongest major market, up 1.8%, and Germany’s DAX rose 1.7%. Broader Europe added 0.4% and Chinese domestic shares 0.4%, while the United Kingdom was fractionally lower at 0.1% and India fell 0.4%. In contrast to Australia, American long bonds rallied, with the ten-year yield down 0.4% to 4.71% while the two-year rose 2.7% to 4.34% — a market pricing tighter policy in the near term and slower growth beyond it. The Federal Reserve’s policy rate is unchanged at 3.60%.

Intel dropped 12.1% after pricing an upsized US$20 billion equity raising — 210.5 million new shares at US$95, a discount of roughly 6.5% to the prior close. The shares finished the week at US$90.07, below the issue price, which tells you what existing holders made of the dilution. The money funds the foundry ambition, and that remains a multi-year bet with no external customer of consequence yet attached.

Moderna more than doubled, up 129.2%, after its personalised messenger-RNA cancer vaccine, developed with Merck, met its primary endpoint in a Phase 3 melanoma trial. It is the first positive late-stage result for a personalised neoantigen therapy of any kind. The shares gave back part of a 177% single-day gain by Friday, and the companies have not yet released the underlying effect sizes, so a degree of caution is warranted until the full data is published.

Commodities

Oil was the big mover, down 5.4% to US$89.31 a barrel on signs of improving shipping through the Strait of Hormuz. Gold gave back 3.2% to US$4,478.10 an ounce after a strong run. Copper rose 1.7% to US$14,535 a tonne and iron ore 0.7% to US$95.84. Natural gas gained 4.2% to US$2.89 and uranium was steady at US$89.50 a pound. The Australian dollar finished broadly unchanged at US$0.72, though it firmed through the back half of the week as rate expectations shifted.

FactSet’s 28 August data shows just how lopsided the American earnings season has been. The Magnificent Seven grew earnings 118.5% in the second quarter, their fastest since at least late 2020, beating estimates by 66.2% against 26.5% for the index as a whole. Strip them out and the other 493 companies still grew 31.8%, the best showing for that group since the end of 2021. The five largest contributors to index earnings growth were Alphabet, Amazon, Micron, Nvidia and Chevron. Notably, analysts expect the 493 to out-grow the seven by the December quarter, at 26.8% against 23.2%.