It was a tough week for markets as a higher-than-expected US inflation print rocked shares globally. The ASX finished down 1.4% for the week, showing some resilience given the S&P500 fell by 4.8%. Investors continue to digest the potential of more aggressive central bank interest rate rises and what this will mean for the global economy. Here are the three things to know from last week:
1. US Inflation drops but remains stubbornly high
Headline US inflation fell again to 8.3%, but this slowdown was less than anticipated, triggering a 2.58% drop on the ASX following the reading, its worst day for over three months.
The decline was driven by lower gasoline prices, which are down an average 26% from their June highs. This is the second straight headline inflation fall from its June peak of 9.1%. But underlying core inflation, which excludes volatile food and energy prices, rose to 6.3%. It is below the 6.5% reading in March but much slower to fall and stickier.
Inflation pressures have likely peaked, but it will be a long battle to get inflation to the Fed’s 2% target. This will keep markets on edge and the Fed on the front foot.
2. AU Unemployment and Consumer Confidence
Last week, The Australian Bureau of Statistics (ABS) reported that Australia’s unemployment rate rose to 3.5% in August, higher than the expected 3.4%, with a total of 33,500 jobs added.
The Reserve Bank of Australia (RBA) wants to see the labour market cool, and this data point could well mean that the labour market has reached its full capacity. This will help governor Philip Lowe in his pivot of easing the pace of interest rate hikes in October.
However, despite the monthly increase, the unemployment rate remains at record lows not experienced since the 1970s, and investors should know that if the labour market doesn’t cool at the pace the RBA wants, we could see higher rates for longer.
3. A winner and loser last week from the S&P/ASX200
It was a tough week on the ASX last week, with just 19 stocks finishing in the green. One of the standout names was Computershare Ltd(CPU), with shares climbing 3.79%. The company is set to benefit from the continued rate rises due to holding lots of cash, and investors have been excited over its prospects.
Link Administration Holdings (LNK) was one of the worst performers last week, with shares tumbling by 22.54%. Investors have been selling down the stock over concerns that its takeover by Dye & Durham could crumble.
*Data accurate as of 18/09/2022. Data Source: Bloomberg and eToro
3 things to watch next week:
1. RBA Meeting Minutes: How likely is Lowe to take the foot off the gas?
The meeting minutes following a central bank rate decision should always be closely watched by investors. This is because it gives us an insight into the RBA’s board members’ discussions on monetary policy and the factors that led to their decision to lift rates by 50bps. The minutes (Sept. 20) will likely give an indication of next steps, if they plan to slow down the pace of tightening and potentially pause their current cycle, as Governor Phillip Lowe alluded to in the statement after the rate decision. In addition, it will be interesting to see if there was more of a dovish tone from members at the meeting, given that from Lowe’s remarks he seems reluctant to consider taking the RBA’s foot off the gas.
2. Fed Rate Decision: Jumbo hikes and domino effect
Following the latest inflation reading out of the US, the Federal Reserve’s aggressive rate hike cycle looks set to continue. A 75bps hike from the Fed seems sealed, but a 100bps hike is not entirely off the cards, with the CME’s Fed Rate Predictor estimating there is a 20% chance that Jerome Powell could opt for a jumbo hike on Sept. 21. The biggest fear amongst investors after the inflation print is that the Fed will need to slow demand even further to bring inflation back to its 2% target. Inflation appears to be sticky, and the US economy seems relatively robust, so the Fed may have little choice but to keep hiking interest rates, even at the cost of economic growth. This week we witnessed a domino effect after the US inflation figures showing how US data significantly impacts the local market, so Australian investors should expect further volatility in the upcoming week, even if a 75bps in the US is cemented.
3. Post-Ethereum Merge: It’s not over
Ethereum’s long-awaited transition to proof of stake finally occurred last week, with The Merge seemingly going off without a hitch. The upgrade will now make the ethereum network 99% more energy efficient. Since the upgrade, the price of ethereum has tumbled by around 20%, hitting a two-month low around USD$1350. The merge is completed, so why is it still something to watch this week? As I mentioned, the upgrade seemed to go through without a hitch. However, this is one of (if not the most) significant technological upgrades in crypto history especially given that ethereum has over 3,500 decentralised apps built on the network. Investors should be cautious of any hiccups in the days following the merge, given the magnitude of this event with results for investors visible in the long term.
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