Market Update 11 February 2022 | AMP Capital

Market Update 11 February 2022 | AMP Capital

Market Update 11 February 2022

Investment markets and key developments over the past week

Share markets started the week on a positive note, clawing back some of the declines that occurred in January. However, the elevated US inflation data worried investors about fast interest rate rises from the US Fed. US share markets fell after the inflation data but were still up by 0.1% over the week (a the time of writing). Australian shares managed to hold onto gains and are 2.4% higher over the week with the market reacting positively to this week’s December half year earnings results. European shares were 2.7% higher over the week, Japan +0.9% and China +3.7% after the Lunar New Year holiday last week.

Iron ore prices rose above $150/tonne after news that China set 2030 as the new deadline for peak emissions for the steel industry (which was 5 years later than the previous target) Higher iron ore prices provide a boost to the Federal government budget. Oil prices remain elevated at around $90/barrel and most metal and agricultural commodity prices rose over the week. The $A rose slightly to 0.71 US dollars.

Higher than expected US January consumer price data (more detail is further down in this report) and the highest in 40 years, will put more pressure on the US Federal Reserve to rein in easy monetary settings at upcoming meetings. US voting Fed member Bullard spoke after the inflation data was released and said that the Fed would need to raise rates by 100 basis points by July. There are three meetings until July (March, May and June) which would mean a 50 basis point increase at one of the meetings and two 25 basis point rises (although the Fed could also hold an intermeeting if required). Market pricing now reflects these comments and assumes interest rates around 1.25% in 6 months time (that’s an increase of just over 1% from current levels). We agree with the market pricing and now see the Fed being more aggressive and front-loading interest rate hikes in the first half of the year to take the heat out of inflation. We expect a 50 basis point hike in March, followed by another 25 basis point rise in May and June. US 10-year yields are now just over 2%, an increase of 25 basis points since early last week. Moves in Australia have been similar, with 10-year yields at 2.18%, from 1.89% early last week.

The peak in annual US inflation is likely to be around February/March, according to our inflation indicators that track both supply chain/pipeline pressures and traditional measures of inflation (like output gaps) – see the chart below. But, with annual inflation now at 7.5% it will take some time for consumer prices to normalise.


capital.img.960.0 - 2022-02-11T190046.347The value of negative yielding debt has plummeted since its peak in December 2020 (down by 272% so far!).


 capital.img.960.0 - 2022-02-11T190052.158

European yields have swiftly moved into positive territory again and Japanese yields are approaching 0.25%, with the Bank of Japan saying this week that it will step in to defend the upper end of its yield target (0.25%).


We see further upside to global bond yields as central banks hike interest rates further. While higher bond yields can occur in tandem with further share market gains, it is unlikely to be smooth sailing as the market worries about interest rates getting hiked too fast.

Coronavirus update

New Covid-19 cases are rolling over again around the world (see the chart below).


Source: ourworldindata.org, AMP Australia
capital.img.960.0 - 2022-02-11T190058.116Source: ourworldindata.org, AMP Australia


New cases have fallen in the US, Asia, South America and now Europe after the recent spike in the UK from the Omicron sub-variant BA.2. Within Europe, cases have fallen significantly in Spain, Italy, France and the UK but are still rising in Germany. Some European countries are opting to remove all Covid restrictions (Denmark, UK, Finland) leaving it up to individuals to manage illnesses which will hopefully not lead to any strains on the hospital systems.


Source: ourworldindata.org, AMP Australia
capital.img.960.0 - 2022-02-11T190105.534Source: ourworldindata.org, AMP Australia


New deaths from Covid-19 and hospitalisations are still running at lower levels compared to previous waves (see the UK as an example below), and are at much lower multiples of new cases which confirms the less severe nature of the Omicron variant, prior covid exposure and vaccines working and better treatment for those infected.


Source: ourworldindata.org, AMP Investments
capital.img.960.0 - 2022-02-11T190111.816Source: ourworldindata.org, AMP Investments


Australian Covid-19 cases continue to decline and deaths are rolling over and are at low levels relative to new cases (see the chart below). There is still a risk that new cases rise as children go back to school but hopefully hospitalisations remain low (as children tend to face less health complications compared to adults).


Source: ourworldindata.org, AMP Investments
capital.img.960.0 - 2022-02-11T190118.075Source: ourworldindata.org, AMP Investments


Around 54% of the world is now vaccinated with two doses and 15% have had a booster. But, vaccine uptake is slowing in the developed world, especially for boosters (because there are now less incentives to get a booster and Omicron has proved less deadly). There is still a risk that a new strain comes along from poor countries where only 22% are fully vaccinated. Rich countries should be assisting poorer countries with access to vaccines and medical staff to administer them.


Source: ourworldindata.org, AMP
capital.img.960.0 - 2022-02-11T190127.860Source: ourworldindata.org, AMP


In Australia, 36% of the population have had a booster shot but again, the take-up has been much slower than the first two vaccines.


Source: covid19data.com.au, Covid Live, AMP Investments
capital.img.960.0 - 2022-02-11T190134.380Source: covid19data.com.au, Covid Live, AMP Investments


Economic activity trackers

Our weekly economic activity trackers have continued to improve this week (albeit very slightly). In the US, jobless claims, job ads, mobility, restaurant bookings and hotel bookings all improved. In Europe, the roll over in Omicron cases has been matched by an improvement in hotel bookings, Apple mobility, restaurant bookings, retail foot traffic and job advertisements. In Australia, credit card spending, mobility, hotel bookings and job advertisements all rose. But, all trackers still have further room to increase to get back to pre-Omicron levels.


Source: AMP Investments
capital.img.960.0 - 2022-02-11T190141.586Source: AMP Investments



Major global economic events and implications


Major global economic events and implications

US January CPI data was stronger than expected. Headline CPI rose by 0.6% (expectations +0.4%) and core CPI (excluding food and energy) also rose by 0.6% (expectations +0.5%). This took annual headline CPI up to 7.5% (from 7.0% in January) and core to 6% (from 5.5%). This was the largest headline annual pace of inflation since 1982.


Source: Bloomberg, AMP Investments
capital.img.960.0 - 2022-02-11T190150.982Source: Bloomberg, AMP Investments


High inflation is still occurring in areas related to pandemic disruption (like used vehicles and air fares). But price growth for everyday items like primary rents and medical care services is also too high and CPI breath is very elevated. Around 75% of components in the CPI basket have annual price growth above 3% (see the chart below). In comparison, around 35% of Australian CPI components have annual price growth above 3%.


Source: Bloomberg, AMP Investments
capital.img.960.0 - 2022-02-11T190156.191Source: Bloomberg, AMP Investments


US NFIB small business confidence fell in January (to 97.1 from 98.9 in the prior month). Small business confidence has been trailing broader business conditions in manufacturing and services (according to the PMI and ISM) – see the chart below since the pandemic which could reflect less pricing power for small businesses or issues with staffing shortages.


Source: Bloomberg, Markit, AMP Investments
capital.img.960.0 - 2022-02-11T190201.399Source: Bloomberg, Markit, AMP Investments


70% of US S&P 500 companies have reported December quarter earnings with 77% of results beating expectations which is just above average. Consensus earnings growth expectations are for a rise of 26% in earnings over the next year, which is a solid result and a good sign for share market returns (especially at a time when interest rates are increasing).


Source: Bloomberg, AMP Investments
capital.img.960.0 - 2022-02-11T190207.944Source: Bloomberg, AMP Investments



Australian economic events and implications


Australian economic events and implications

December quarterly retail data showed a big 8.2% rise in the volume of retail sales over the quarter, a bit stronger than expected. This will make a positive contribution to December quarter GDP growth of 1.4 percentage points (after retail detracted 0.8 percentage points in the September quarter during the Delta lockdowns). Our current forecast for December quarter GDP is 3.0% lift (after a 1.9% decline last quarter) with annual growth running at 3.6% (this looks high but it reflects the bounce back in growth after the Delta lockdowns). March quarter GDP is expected to be softer (our current forecast is a rise of 0.4%) as January activity was negatively impacted by the Omicron outbreak.

ANZ job ads fell by 0.3% in January after a 5.5% decline in the prior month but have been very over the past year and are still 27.3% higher than a year ago. The January NAB business survey showed a drop in business conditions (down to 3 from 8) but a lift in confidence (up to 3 from -12) but the January survey is complicated by the Omicron outbreak which caused some weakening in economic activity and staff shortages. Lower Omicron cases in February shoul


Source: NAB, AMP Investments
capital.img.960.0 - 2022-02-11T190217.768Source: NAB, AMP Investments


The February Melbourne Institute consumer confidence survey fell again in February (for the third month in a row) to 100.8 which means that confidence is just positive (a reading of 100 is neutral). This is in line with the weekly ANZ consumer confidence readings that have been trending down in recent weeks. Consumer confidence is now at its lowest level since September 2020. While low consumer confidence is generally not a good sign for consumer spending, retail consumption doesn’t seem to have been affected too much (so far).


Source: NAB, AMP Investments
capital.img.960.0 - 2022-02-11T190223.869Source: NAB, AMP Investments



RBA Governor Lowe appeared before the Standing Committee on Economics in parliament and re-iterated that the central bank has time to be patient in raising interest rates because high inflation is still reflected some Covid-related disruptions. Lowe noted that raising rates too soon could slow progress in the labour market at a time when the unemployment rate is moving lower. In our view, the RBA will only have a limited amount of time to be patient before it has to raise interest rates. We see inflation and wages running above the RBA’s forecasts in 2022 which will result in rate rises starting from August (although the risk is an earlier move in June after the election). This is probably sooner than the RBA themselves expect at the moment but inflation is increasing swiftly around the world, which Australia is now catching up to.

December half-year earnings continued this week, but only around a quarter of ASX200 companies have reported results so far. Consensus earnings expectations for this financial year are for a 13% rise in earnings led by energy, industrials, and financials. Given Delta and Omicron disruptions a key focus will be on outlook statements.

Australian borders will completely open to fully-vaccinated tourists from February 21 (subject to arrival caps and quarantine requirements of each state/territory). An inflow of overseas workers could put some downward pressure on employment growth and wages, but it depends how fast workers come back. Some industries facing skills shortages (like hospitality) would welcome the move.


What to watch over the next week?


What to watch over the next week?

The US University of Michigan confidence index should show unchanged consumer sentiment in February. Confidence has been falling since mid-2021 on higher Omicron cases and rising inflation. January industrial production data, February NAHB housing index and January retail sales figures are all released on Wednesday along with the FOMC meeting minutes for the January Board meeting. The meeting minutes are likely to reflect the sentiment in the January press conference which sounded hawkish on interest rate rises without being panicked. Although all of this looks a little dated now after the January inflation data and comments from Bullard. January building permits, housing starts and existing home sales figures are also released (on Thursday). US December quarter earnings season also continues next week.

In Europe, Euro area industrial production for December is released (on Monday). December quarter employment (released on Tuesday) is likely to be negatively impacted by high Omicron cases over the quarter, similar to the low rise in December quarter GDP.

UK data next week includes the December unemployment rate (released on Tuesday) and January consumer price data for January (released on Wednesday) which is expected to show core inflation remaining high at over 4% per annum.

In Japan, December quarter GDP (released Tuesday) is expected to show a 1.5% lift but this follows a drop in the September quarter from Covid-related issues. January consumer price data (on Friday) is expected to show a lift of 0.6% but in core terms (excluding fresh food and energy) annual inflation is likely to be 1% lower over the year to January.

China consumer price data for January (released on Wednesday) should show annual price growth of 1% over the year to January.

In Canada consumer price data for January (released on Wednesday) should show continued strong inflation pressures with core consumer price data tracking around 5% on an annual basis.

In Australia, RBA Board minutes for the February meeting are out (on Tuesday) but it’s difficult to see anything new in them given the release of the Statement on Monetary Policy, The Governor’s speech last week and the appearance before parliament today. January employment data (released on Thursday) is expected to show a fall in jobs over the month, by 20K because of the decline in economic activity in January, (according to the timely activity indicators) from the outbreak of Omicron. A decline in the participation rate (from 66.1% to 65.9%) should help to keep the unemployment rate low at 4.1%. December half year earnings also continue with around another 50 companies reporting next week including Carsales.com, BHP, Seven West Media, Dexus, Treasury Wine Estates, Vicinity Centres, Fortescue Metals, CSL, Santos, Wesfarmers, Transurban, Magellan, Newcrest Mining, Tabcorp, Whitehaven Coal, Woodside Petroleum, Crown Resorts, Goodman Group, Origin Energy, Telstra and QBE.


Outlook for markets


Outlook for markets

Global shares are expected to return around 8% this year but we may now be starting to see the long-awaited rotation away from growth & tech heavy US shares to more cyclical markets. Inflation, rate hikes, the US mid-term elections and China/Russia/Iran tensions are likely to result in a far more volatile ride than 2021, and we are already seeing this.

Despite their rough start to the year Australian shares are likely to outperform helped by stronger economic growth than in other developed countries and leverage to the global cyclical recovery.

Still very low yields & a capital loss from a rise in yields are likely to again result in negative returns from bonds.

Unlisted commercial property may see some weakness in retail and office returns, but industrial property is likely to be strong.

Unlisted infrastructure is expected to see solid returns.

Australian home price gains are likely to slow with prices falling later in the year as poor affordability, rising mortgage rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact.

Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.

Although the $A could fall further in response to coronavirus and Fed tightening, a rising trend is likely over the next 12 months helped by still strong commodity prices and a decline in the $US, probably taking it to around $US0.80.

 

By Diana Mousina
Economist – Investment Strategy & Dynamic Markets Sydney Australia



 


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Original Author: Produced by AMP Capital and published on 11/02/2022 Source