Commodity prices rose 32% in US$ over FY22 largely boosted by energy related commodities. Excluding energy, commodity prices rose 6% for the financial year.
Australian Share Market (ASX200) – down 0.6% but outperforming US equities where offshore leads were weak. The defensive undertones persisted with the Utilities sector (+1.47%) leading the gains followed by Industrials (+1.16%) and Consumer Staples (+0.70%). Telecoms (-2.20%) led the declines followed by Info Tech (-2.13%) and Materials (-1.71%). The Materials sector is down 4 weeks in a row with Bloomberg’s Industrial Metals Spot Subindex down 26% for Q2 and the biggest quarterly drop since the financial crisis in 2008. To keep this perspective though Q1 was the strongest start to a year for commodities on record. Certain commodities have fallen sharply in recent months as hawkish central bank policy has raised concerns around recessions that would slow demand for industrial metals. The withdrawal of central bank liquidity is likely also weighing on prices. Aussie retail sales data for May was very strong last week increasing by 0.9% over the month, ahead of the 0.4% expected and was the 5th monthly rise in a row to be up 10.4% over the year to a new record level of spending. National Retail Association Chief Executive Dominique Lamb said it is a great result for the industry, which has been under pressure with rising supply costs, interest rates and wage and superannuation increases. ABS data last week showed job vacancies in Australia surged to an all-time high in May. According to the report there were 480,000 job vacancies in May 2022 across the country, 58,000 more than the last quarterly report in February 2022. Data showed private sector vacancies were 439,100, an increase of 14.2% from February 2022. Public sector vacancies were 41,000, an increase of 9.4% from February 2022. Jobs growth has been very strong over the past 12 months with our jobless rate falling to a 48 year low of 3.9%. The strong retail sales and job vacancies data will give the RBA comfort that the economy can handle higher rates ahead of their July meeting tomorrow.
US Share Market (S&P 500) – down 2.21%, with the Dow (-1.28%) and Nasdaq (-4.13%) all giving back some of the prior week’s big gains. Last week capped off the end of the first half of 2022 with the S&P500 having its worst first half since 1970 while the Nasdaq and US treasuries had their worst first half on record. Looking forward there are signs the inflation surge of the past 12 months could be abating and while inflation levels are likely to remain elevated they are unlikely to keep rising at the rates seen over the first half of 2022 with some noticeable disinflation themes emerging during the week. Commodity prices (except oil) continued to pull back taking some pressure off the surging input prices and bonds rallied to see the US 10 yr. yield back below 3% for the first time in a month after it had spiked to a new 11 year high of 3.5% earlier in June. The data highlight was the May core PCE inflation that rose 0.3% for the month, in line with last month but lower than the 0.5% expected. US consumer confidence fell more than expected and to the lowest since February 2021 with the weak outlook largely due to increasing inflation concerns with the one year inflation outlook rising to 8.0% which was a new series high. There was also further weakness in the high frequency economic data that was supporting the peak inflation narrative. The Richmond Fed index was a big miss down 10 points for the month to -19.0, missing consensus for 1 point gain and the lowest since May 2020. And US central bankers remained out in force continuing the hawkish rhetoric in the hope they can talk down the rising inflation expectations. The 2Q US earnings season starts next week where profit margins are expected to come under increasing scrutiny. The first half equity market weakness was largely due to P/E compression as inflation and bond yields surged. With prices having now fallen, and some economic weakness starting to emerge, attention will be on the resilience of earnings with a number a companies lowering guidance last week ahead of their results.
Macquarie (MQG) the latest to issue new Capital Notes as issue margins continue to rise. Macquarie was the latest bank to issue new hybrid securities with an announcement last week that they are issuing a new capital notes 6 offer. Macquarie has said the offer proceeds will be used for general corporate purposes and will constitute eligible regulatory capital that provide an equity capital buffer. The issue margin is expected to be in the 3.70% to 3.90% range and is the highest issue margin seen in several years. Hybrids were being issued at 2.7% to 2.9% late last year. There has been a flurry of hybrid issuance recently with the recent NAB issue as expected but Westpac unexpectedly brought forward their recent issue by a few months followed by this one from Macquarie. It looks like the banks are bolstering their capital positions ahead of any potential fallout as we move through this period of rising interest rates.
Sony (SONY) to start new electric car company with Honda. Technology and software company Sony has announced they are teaming up with car manufacturer Honda to start a new company to produce electric cars by 2025. The cooperation between the two Japanese corporates aims to shake up the previously insular electric vehicle industry. The joint venture is called Sony Honda Mobility and will see each company invest approximately 5 billion yen (US$37.52 million) in the venture initially. The plan is to “bring together Honda’s cutting-edge environmental and safety technologies, mobility development capabilities, vehicle body manufacturing technology and after-sales service management experience, with Sony’s expertise in the development and application of imaging, sensing, telecommunication, network and entertainment technologies, to realize a new generation of mobility and services for mobility that are closely aligned with users and the environment, and continue to evolve going forward,” according to a statement.
Citigroup (C) the latest bank looking to sell Russian operations. The Financial Times reported last week that Citi is in discussions with several private companies about potentially buying their business in Russia. Potential buyers included Expobank, Rosbank and Reso-Garantia. The report also noted that UniCredit is also looking to exit Russia but the costs are starting to add up with far more sellers than buyers depressing prices and write downs mounting with some now unwilling to take as large a hit as the €3.1 bill that Societe Generale took when they recently sold Rosbank. Companies exiting their Russian operations at significant cost has been a key theme of the past 4 months since the conflict escalated.
The Week Ahead
Domestic data this week includes building approvals and housing finance today. The RBA meeting tomorrow is the highlight of the week with the market expecting another 50 basis point rate hike to be announced. The AIG construction index is also tomorrow with the balance on goods and services Thursday.
Internationally, the US is closed tonight for independence day celebrations but will see PPI data from the Eurozone and German trade balance. Wednesday sees US durable goods and factory orders, German manufacturing data and Eurozone retail sales. Thursday has US JOLTS job openings and the FOMC minutes from the June 75 basis point rate hike meeting and US trade balance. With Friday seeing China loan growth and money supply and the highlight of the week which will likely be the US non-farm payrolls and unemployment rate.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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