The Australian share market as measured by the ASX 200 Index was up +2.9% in July. The index of Energy shares led the way rising 8.8% whereas the Indices of Financial and IT companies rose 4.9% and 4.4% respectively. Good results all things considered. The indices for Staples and Healthcare went backwards in July.
It would appear that equity investors have gradually moved to be more accepting of a ‘soft-landing’ scenario for the economy and are allocating capital back into shares as markets are trending more positively. While a ‘hard landing’ remains a risk for markets, data, particularly in the US, continues to support a ‘soft-landing’ outcome.
The US S&P 500 Index of the largest 500 companies listed on the US share market had a strong July rising +3.1%.
Much attention continues to be paid to the magnificent 7 large cap technology stocks listed in the US and, while they have performed well and largely carried the market to its loftier heights, the positive move in the market has been broader than these stocks alone. This broadening provides a degree of comfort in the general health of the share market.
Bonds and Interest Rates
In a widely telegraphed move the Fed raised its cash interest rate by 0.25% to a range 5.25% to 5.5% (the highest level in 22 years). The RBA, on the other hand, decided to leave our cash interest rate on hold at 4.1% p.a. at is meeting on August 1. The European Central Bank (ECB) took its base interest rate to a record high level of 3.75% p.a. The Bank of Japan (BoJ) unsurprisingly stayed at ?0.1% p.a. but it did adjust the allowed movement around its longer maturity bond rates (e.g. 10-year Government bond.
It appears that the mood across developed economies at least is that central banks are at or near their expected highs for interest rates. The US Fed has an estimated probability of 20% for one more interest rate increase to be announced at its next meeting on September 20th. With inflation seemingly coming under control, there is a growing belief among many analysts that the Fed might already be ‘done’ raising rates.
The US 10-year Government bond rate has moved both up and down in recent months. The latest move was to briefly rise back above 4%. We note that after a period of volatility the US bond market is stabilising somewhat.
The price of oil moved sharply higher in July (+14%) fuelling gains in the energy sector of the ASX 200.
The price of iron ore was down a little (?1.9%). The price of copper was up +3.6%. The price of gold was up +2.7%. The Australian dollar appreciated 0.8% over July.
The VIX volatility index, a measure of share market volatility, closed July at 13.6, a level that is in the normal range.
Our jobs report for June was strong with 33,600 new jobs being created and the unemployment rate at 3.5%. Of course, immigration is strong perhaps helping the increases in the demand for labour.
Dr Philip Lowe was not reappointed for a second term as RBA Governor. He is to be replaced by the current Deputy Governor, Michele Bullock, on September 17th. We do not think that change will make a material difference to the conduct of monetary policy, particularly as inflation is now receding.
We do not think the RBA will start cutting interest rates any time soon unless, or until, more of a material slowdown in economic growth is observed. Retail sales fell by ?0.8% over the last month but rose 2.3% on the year. In other words, the annual growth in retail sales at current prices is about the same as the general level of prices so inflation-adjusted retail sales have been flat.
China data are a little mixed. The latest GDP growth for the June quarter came in at 6.3%, 1% below the expected 7.3%. Both figures are well above the long run expectation of a little over 5% p.a. because of the ‘base effect’ of coming out of the three-year long lockdown. However, the quarterly growth was 0.8% against an expected 0.5%. That bodes well for the September quarter.
The usual monthly growth statistics of retail sales, industrial output and fixed asset investment were at or above expectations but weaker than pre-pandemic rates. Exports and Imports both contracted in the latest month and were worse than expected. Youth unemployment was reported to stand at 22.3%! No doubt a concern for Chinese authorities.
China manufacturing PMI came in at 49.3 making it the fourth successive reading below 50 (a reding below 50 indicates contraction). However, the index has risen slightly in the last two months from a low of 48.8 in May.
US employment growth (non-farm payrolls) increased by 209,000 in June slightly missing the expected 225,000, but the unemployment rate fell from 3.7% to 3.6%. Importantly, around 150,000 of the jobs created were in government positions and lower-level healthcare. This change in the mix could be a sign of weaker jobs growth to come and, hence, to a softer monetary policy stance from the Fed.
The US has two more Consumer Price Inces (CPI) reports and two more employment reports before the next interest rate setting meeting on September 20th. The Fed will also be hosting the Jackson Hole global conference for Central Bankers in late August. Should we expect a joint statement that the bulk of the work on inflation is over?
US June quarter GDP growth surprised to the upside at 2.4% when 2% had been expected. We recall that March quarter growth was 1.1% for the preliminary estimate reported in April which was then revised upwards to 1.3% and then 2% in June, indicating some resilience in the US economy.
US retail sales were weak at 0.2% for the month and industrial output went backwards at ?0.5%. Despite this the mood continues to remain sanguine.
UK wage inflation grew the equal fastest on record in the three months to June 30 at 7.3%.
France’s GDP growth for the June quarter came in at 0.5% against a forecast of 0.1% and a previous reading of 0.1%. Inflation came in at 4.3% from a previous reading of 4.5%.
There is little in Europe data to give us much joy but they seem to be struggling through rather than collapsing. The latest European Union GDP growth data for the June quarter ended the run of two consecutive quarters of negative growth rates with a rate of 0.3% against an expected 0.2%.
Rest of the World
Japan’s inflation is off its recent high at 3.3% and core inflation was 4.2%. The Tokyo core inflation read was 3% which beat expectations. Japan retail sales came in at 5.9% above the expected 5.6%. However, industrial output at 2.0% was slightly below forecast.
Russia has reportedly ended the food corridor for ships carrying Ukrainian grain exports to pass freely though the Black Sea. There are many reports of the Ukraine fighting back by firing missiles at Russian targets. There seems to be no peace in sight. There is an elevated chance of a hike in food and fertilizer prices from these recent moves but we do not see it as having the same effect as at the start of the invasion in February 2022. Alternative sources of supply have, to some extent, been found.