The ASX 200 was down just 0.1% on the month but the Financials sector reported modest gains (+0.8%). Since the futures contract price for the ASX 200 index were up nearly 1% for the November open, the fall on the last day of October was nothing to worry about. The index is up 11.2% on the year-to-date.
After the August reporting season worked its way through broker forecasts of earnings and dividends, our analysis suggests we are back to expecting a slightly above average 6% gain in the index over the next 12 months. Dividend yield is expected to be 3.7% in addition to that capital gain with franking credits also available for relevant investors.
We calculated the market was modestly under-priced at the start of November to give the index a little extra boost towards Christmas and the year end. However, the inflation outlook and central bank activity could negatively impact on the market if they are not handled well.
The S&P 500 had a stellar month’s gain of 6.9%. Emerging markets had a far more modest gain of 0.8%.
A lot of the Wall Street market bounce in October was probably due to the particularly strong September quarter earnings reports for a number of the big banks. Indeed, much of the market reporting so far has been for strong earnings and revenue, many of these well ahead of analyst’s forecasts. US market mega cap stocks Apple and Amazon, however, underperformed and stopped the broader index rising further.
Bonds and Interest Rates
Yield curves in the US and Australia have been making some big moves in recent times as analysts try to work out whether inflation really is ‘transitory’ as the Fed would have us believe. The consensus is that the Fed and the RBA will have to act much earlier than previously expected – we believe the jury is still out on this call – and while inflation has risen, we think there will need to be a corresponding sustained lift in growth as well.
We think central bankers appreciate that the major sources of the inflation ‘blip’ would not be improved by hiking rates. Energy prices and supply-chain bottle-necks are likely unaffected by central bank action.
The fights between banks and markets might well cause additional volatility in both bonds and equity markets.
Given the fall in iron ore prices, we might have expected some softness in the Australian dollar but it might be being offset by movements in oil prices and bond yields.
We expect the Fed and the RBA will have to acknowledge the inflation issues but not necessarily act other than the Fed announcing the start of tapering at some modest rate – say $15 bn per month – from December which would have their bond purchasing program cease by mid-2022.
The CME Fedwatch tool that prices market expectations about US rate hikes predicts two or three hikes in 2022 as the more likely outcome with only a 5% chance of no hikes next year. Since hiking interest rates while still tapering the bond buying program goes against Powell’s stance, he will have to be word perfect in his delivery of any amended policies.
The RBA will likely abandon its yield curve management as the market has won that battle. It should take a lot more to make the RBA hike overnight rates as our economy is too weak to take a hit at this time. If our COVID fears are realised, we expect the first hike still in 2024 – along with the RBA – but a little sooner if our economy returns to growth in the last quarter of 2021 and beyond.
The price of iron ore stabilised somewhat over October after a rapid fall in the prior period. China was forced to take its Australian coal out of bond after a year-long ban on coal imports from us. With winter rapidly approaching, China could not afford to let policy interfere with the global energy crisis.
The price of gold recorded a modest gain of 1%. The price of oil was again up firmly by around 8-11% in October while the $A gained 4.7% against the $US.
The Labour Force survey again produced mixed results. While the unemployment rate was a modest 4.6%, the number of jobs lost was 138,000. This puzzle is resolved by noting that the participation rate fell sharply indicating ‘discouraged workers’.
Some big firms are reportedly offering inducements to attract workers back to office in the city. One firm is reportedly giving workers who turn up $20 a day to spend on lunch or local businesses. Casual observation of restaurants and cafes in Sydney does not suggest workers are rushing back to normal life – even compared to what was normal in COVID times just before the lockdown in June.
We currently see Australia avoiding a recession but we expect some lumpiness in economic activity. The Westpac and NAB surveys of consumer and business confidence suggest things are ‘okay’ but not good. The run-up to Christmas and the experience of children returning to school will be all-important in determining the strength of the platform on which 2022 economic activity will be based.
China’s economy continued to slow again in October. Its GDP growth came in below expectations at 4.9% and the partial indicators of retail sales and industrial output also missed by quite a bit.
The Evergrande property developer debt default situation appears to be being handled well enough not to upset broader markets. China must do what it takes to avoid this becoming a contagion. We expect China to be successful in its endeavours on this front but at the expense of stimulating the broader economy. Depending on how this plays out Australia’s economy is likely to suffer somewhat as a result.
The US nonfarm payrolls again disappointed with a gain of only 194,000 jobs. That number would be good in normal times but many people lost jobs in the lockdown who are not being re-hired. The unemployment rate of 4.8% against an expected 5.1% masks the true state of the labour market.
Retail sales surprised on the upside at 0.7% against an expected 0.2% and wages rose by 0.6%. The economy is patchy by geography and industry sector making these numbers particularly hard to interpret.
Elsewhere, President Biden has slipped to 41% approval against 52% disapproving. The -11% margin between those figures should be contrasted with the +3% in the previous survey.
The UK has suffered serious petrol shortages – not because of supply, but because of a lack of drivers to shift the tankers. Apparently, the UK was heavily reliant on Eastern European drivers prepared to work for lower rates of pay compared to British drivers. That foreign labour source dried up with Brexit.
UK Prime Minister Johnson is bravely leading the British economy in a post lockdown world when it is becoming increasingly clear that some restrictions – even a lockdown – might again become necessary.
Europe is suffering fuel shortages, some of which are self-induced by not having stock-piled in the warmer summer months. Russian President Putin stated that a lack of wind in the Russian summer has exacerbated the energy situation. Inflation in Europe has, as in the rest of the developed world, risen markedly in recent months.
Rest of the World
Canada is reportedly ready to end tapering and commence rate hikes. New Zealand has already started hiking rates. We do not think Australia should follow suit just yet.