The ASX200 finished lower for the fourth consecutive week but looks set for a brighter week ahead following a positive lead from Wall Street, with the S&P500 closing up 1.6% on Friday. Energy and Materials were the only two sectors to finish in the green last week, gaining 5.2% and 4%, respectively. Miners led the charge with further optimism from investors over China’s re-opening.
3 things that happened last week:
1. Inflation falls in January
Australian monthly inflation decelerated in January, indicating that inflation in Australia has likely peaked and price pressures are slowly starting to ease. The monthly figure came in at 7.4%, a fall from 8.4% a month earlier. The most significant contributions for the month came from housing (up 9.8 per cent), food and non-alcoholic beverages (up 8.2 per cent) and recreation (up 10.2 per cent). Some of the most significant price falls came from fruit and vegetables and holiday travel. Fruit and vegetables will likely see further price declines in the months ahead as local weather improvements drive down prices. The positive for investors is this is exactly what the RBA wanted; a decline in inflation coming in well below forecasts.
2. Q4 GDP misses expectations
Australia’s Gross Domestic Product (GDP) grew by 2.7% year-over-year in Q4 showing a slowdown in growth from 5.9% in the previous quarter. Quarter-over-quarter growth was 0.5% and missed expectations of 0.8%. Softer consumer spending was a key driver of the slowdown. Despite rising income, households reigned in spending on goods as higher rates and inflation sapped purchasing power. The slowdown in growth could also continue as the RBA’s tightening continues. Its extensive hiking cycle and further increases this year are likely to dampen household spending further through 2023.
3. A winner and loser last week from the S&P/ASX200
Liontown Resources (LTR) was the biggest winner on the ASX last week, gaining +19.4%. The move comes after broker, Bell Potter upgraded its ‘buy’ price target to $2.81, almost 70% higher than Friday’s close.
On the other hand, it was a tough week for Lynas Rare Earths (LYC) as its share price fell -8.7%. The rare earth producer saw a 4% drop in first-half profits and faced regulatory headwinds in Malaysia.
Source: Bloomberg
3 things to watch for the week ahead:
1. RBA Rate Decision
Investors will be relieved to have seen January’s monthly inflation reading below estimates at 7.4%. That data, combined with weaker than anticipated GDP, has pared back expectations on interest rates with a slowdown in economic activity. However, the RBA still has work to do in order to bring inflation back to its 2% target, which is why the central bank will almost certainly hike by another 25 basis points this week. What’s clear is that the peak of interest rates is within touching distance, and this new data will mean that the RBA will feel they don’t need to be as aggressive with future rate hikes. Governor Philip Lowe has already addressed the delicate balance between inflation and damaging households, saying: “People are really hurting, I understand that. But I also understand that if we don’t get on top of inflation, it means even higher interest rates and more unemployment.” Ultimately, if rates continue to move higher, investors may continue to rotate away from growth stocks and focus on value stocks, with stable income and dividends.
2. Airlines come soaring back
The pandemic crippled much of the economy, but it couldn’t have been any worse for airliners. The airline industry lost USD$187 billion in the past three years, with borders closed and travel demand dented. But, fast-forward to 2023, airliners are now outperforming with soaring profits, and the recovery in demand is set to continue. Global airlines are expected to post their first profits since the 2020 pandemic this year, with Qantas (QAN) expecting to see net income in excess of AUD$1.5 billion. Airliners are in a unique situation where they have pricing power. Capacity has taken a downturn after being stripped during the pandemic, so given the limited available seats on aircrafts and the strong appetite for travel, airliners are ramping up fares. In January, holiday travel and accommodation prices soared 17.8% in the inflation reading. Although prices are high, 2023 won’t be plain sailing, with headwinds such as labour costs, squeezed household budgets and recession risks. It seems for now, though, that consumers aren’t willing to give up travel after the pandemic, with many viewing travel as an essential. This will benefit names such as Qantas and Flight Centre (FLT), and investors are already seeing the rewards this year, with shares up 8% and 29%, respectively.
3. Markets to take a breather in March
Equities have seen one of the strongest starts to the year in history, with the ASX having the best January for over 20 years, before pulling back in February. Overseas, the S&P500 has had its 2nd strongest start to the year in 30 years, and the Nasdaq seeing its strongest run since 2001. Depressed asset classes from 2022 have led the performance with growth and tech shares surging, outside of equities, crypto has been the best-performing asset class this year. However, the recent rally might be running out of legs. One of the main drivers of this rally has been the fall in bond yields, given the worry over recession risks, but yields have started to rise once again, with the 10-year yield in the US rebounding from 3.4% to 3.9% as recession risks dwindle. The Fed doesn’t look set to be cutting rates soon, and the 10-year yield may not be falling quickly either. Ultimately, the inflation fight isn’t over, and although we are long-term optimistic, investors should take caution in the size and speed of the rebound this year.
*All data accurate as of 06/03/2023. Data Source: Bloomberg and eToro
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