The ASX200 stumbled for the first time in 2023, with the index falling by -1.4% last week, with every sector finishing in the red. Real estate, utilities and tech drove the index lower, with all three sectors falling by more than 3% for the week.
It was a similar story overseas, with all three major US indexes finishing in the red, led by the Fed’s hawkish rhetoric and higher bond yields. Crypto retraced from recent highs after leading asset performance in 2023, bitcoin fell to $21,000.
3 things that happened last week:
1. RBA Raises rates, stays hawkish and raises inflation forecasts
It was a big week for the RBA last week as they hiked by another 25bps and underscored the need for even higher interest rates citing, “Inflation in Australia is too high and is broadly based.” The latest rate rise now takes Australia’s cash rate to 3.35%, the highest level for over ten years. Governor Philip Lowe took a hawkish tone in his statement following the hike, saying they expect further increases in interest rates over the coming months to bring inflation to target. After this statement, The Reserve Bank on Friday forecasted that trimmed mean inflation would rise to 6.25% in the year ending June, up from 5.5% previously predicted. Ultimately, the RBA is worried that inflation could become entrenched in the Australian economy and will take the necessary steps to ensure that it doesn’t.r
2. Rate hikes dampen real estate earnings
It was a tough week for real estate stocks reporting results as interest rate hikes continue to dampen buyer demand. Mirvac Group (MGR) reported operating profit for the first half year ending December 2022, which beat analyst expectations at AUD$305 million. However, statutory profit was down 62 per cent with lower investment property revaluations. Importantly for investors, though, the group didn’t stray from its full-year outlook as it reaffirmed earnings and dividend payouts. This was key for Mirvac, as markets focus on guidance this reporting season. REA Group (REA) saw net profit fall, and its outlook didn’t offer much conviction that they could reach FY23 targets. The results were unlikely to fill investors with a lot of confidence, given it may be a difficult second half of the year for the group.
3. A winner and loser last week from the S&P/ASX200
Newcrest Mining (NCM) led the ASX200 last week, with shares jumping +10.24%. The move comes after the world’s biggest miner, Newmont Mining, offered USD$17 billion to acquire the local Aussie miner.
Novonix (NVX) shares pulled back last week, falling by -13.10% after its good start to the year. Investors took the chance to take some profits off the table as shares bounced from their lows.
3 things to watch for the week ahead:
1. ASX200: Reporting Season shifts up a gear
It’s been a choppy start to the reporting season, but earnings growth has been pretty resilient at 10%, with over a quarter of the index reporting. The materials sector is leading the way with 40% growth, beating estimates, whilst financials are also outperforming, unsurprisingly. The RBA’s fastest interest rate cycle for decades is a win for banking margins. Banks have been quick to pass on rate rises to borrowers but not so quick to savers, boosting net interest income, which will continue to be a theme across reporting season for financials.
One name to watch for this week is JB-Hifi (JBH) on Feb.14. Consumer discretionary stocks have been the standout surprise in US earnings season, and local retailers could have a similar fate. Consumers continued to spend in the 2nd half of 2022, particularly around Black Friday, which could be a huge boost for JB-Hifi. However, as always, outlooks will be the key, and this will be a focal point for retailers, particularly if the RBA’s financial tightening continues to dampen consumer spending.
Another key sector to watch will be Materials, and Whitehaven Coal (WHC) will be on the top of many investors’ lists this week. With many other miners set to lower dividends, Whitehaven looks set for another increase after its mammoth year. Its guidance on growing costs with inflation biting will also be watched, but with coal prices staying elevated, investors could continue to be rewarded in 2023.
2. Australian Unemployment Rate – Peak unemployment is behind us
Last month Australia’s unemployment rate stayed near decade lows at 3.5%, and January’s reading this week (Feb.16) is expected to show the rate unchanged. This is, of course, a good sign, as a strong labour market helps Australia avoid a recession. However, a low unemployment rate is a double-edged sword, as a tight labour market means wage growth continues to rise. The RBA doesn’t want wages to spiral as they are a key contributor to inflation, the very thing they’re trying to control. However, the good news or maybe the bad news for some, is that we’ve likely seen the peak of Australian unemployment, particularly with the recent surge in migration, and wages may cool in the coming months.
3. US CPI – A 7th straight decline on the cards
The Federal Reserve lifted interest rates by 25bps in their first meeting of 2023 as they look to combat soaring inflation. After peaking in June, US CPI has fallen for six consecutive months, so will January’s (Feb.15) reading be seven? Inflation has trended lower with energy and food costs easing, but services inflation is still sticky, which is what the Fed is trying to get under control and why Jerome Powell has implied that the inflation fight is not over. The common theme is likely to be that inflation is declining again. However, the risk is that prices aren’t falling as quickly as the Fed desires and would justify further rate hikes. Essentially, the Fed has no incentive to take its foot off the gas with a dovish approach, if they give an inch, the market will take a mile, and it’s easier to cut if they make a mistake rather than re-tighten. The RBA pointed towards global inflation in its statement after hiking rates last week, so another fall in inflation across the pond will also be critical for the RBA.
*All data accurate as of 13/02/2023. Data Source: Bloomberg and eToro
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