The global rout across markets continued last week as investors digested the growing risk of the US economy entering into a recession. The ASX 200 finished down 1.5% last week, making September the second worst month of the year.
Apple was a big drag on markets after Bank of America analysts downgraded the stock to neutral, citing weaker demand from consumers for its new iPhone14, the S&P500 and Dow Jones both dropped by 2.9% for the week. Despite the sell-off on global stock markets, crypto remained relatively resilient, with bitcoin and ethereum flat for the week.
3 things that happened last week:
1. Australia’s First Ever Monthly CPI Reading
Before this month, Australia was just one of the few remaining major economies to report inflation on a quarterly basis. However, last week saw the first ever monthly CPI reading after the Australian Bureau of Statistics (ABS) decided to publish the data monthly rather than quarterly. It’s important to note the monthly data will only cover the price changes of around 60 to 70 per cent of the goods in the ABS’s consumer price index basket. The CPI data last week showed that annual inflation rose to 6.8% but fell from the 7% figure in July. The month-over-month fall was mainly due to the decrease in fuel prices, but the biggest contributor to the year-over-year figure was new dwelling construction, up 20.7%. This new data will be key in helping the Reserve Bank of Australia (RBA) through its current rate cycle.
2. AU Retail Sales
Australian retail sales rose for the eighth straight month, highlighting consumer resilience amid interest rate increases. The ABS data showed sales climbed 0.6% from July, beating forecasts for a 0.4% gain, with retailers posting higher sales every month this year. The data shows that households are continuing to spend despite inflation worries. This sales growth could be positive for retail stores such as Wesfarmers (WES) and JB Hi-FI (JBH). However, this resilience isn’t something that will be indefinite, especially if the RBA continues to keep raising rates.
3. A winner and loser last week from the S&P/ASX200
It was another tough week on the ASX, but a few stocks were bucking the trend. But, one of the standout names was Resmed CDI, climbing 5.6% for the week. Healthcare stocks are less vulnerable to the tightening financial cycle by central banks, which may be a key to the outperformance last week.
Last week, one of the best-performing stocks in 2022 was the biggest faller on the ASX. Core Lithium shares dropped 20% for the week after major shareholder, Ganfeng sold down a portion of its shareholding, meaning they were no longer a substantial shareholder.
*Data accurate as of 30/09/2022. Data Source: Bloomberg and eToro
3 things to watch next week:
1. RBA Rate Decision: Are we ready to slow down?
Oct. 4 sees another rate decision from the RBA, and the big question will be whether the central bank raises rates by 25 or 50 bps. It will be a close call between the two, given a slew of economic data in the last few weeks. The US Federal Reserve made another aggressive hike of 75bps which could influence Governor Lowe’s decision this week. However, retail sales and inflation data last week were positive. Retail sales climbed for another month, showing consumer resilience, and the first monthly CPI reading showed that inflation had dropped by 0.2% month-over-month. The RBA’s tone seems to suggest they are ready to slow the pace of their hikes, but a look at other economies indicates that more work is likely needed to squash inflation altogether. However, compared to the rest of the world, Australian households are some of the most indebted in the world, meaning the RBA is unlikely to raise rates as aggressively as other economies, given the pain it would cause local households.
2. Australia Balance of Trade: Mineral sales are dropping
On Oct. 6, Aussies will get an update on the balance of trade for August. This data print is the total value of exports minus the total value of Australia’s imports. Economists use the balance of trade to measure the relative strength of a country’s economy, and it also supports the Australian Dollar when the balance is positive. July’s reading showed a sharp decline to AUD$8.73 billion from June’s record reading of AUD$17.13 billion as exports plunged due to a slowdown in coal, metal and mineral sales. This drop comes from weakness in China, Australia’s largest export destination, given their weakening economic growth with continued COVID lockdowns. These slowdowns in China could hurt this month’s trade balance numbers again, which would then likely weaken overall economic growth in Australia.
3. US Non-Farm Payrolls: Bad news is good news for the markets
Another crucial data set will be released from the US on Oct. 7, with Non-Farm Payrolls giving us a look into the US job market. The US economy added 315,000 jobs in August 2022, coming in above market forecasts. The positive from the report was the wage growth that came in lower than expected, which will be another focal point of this reading. The Federal Reserve wants the red-hot labour market in the US to cool, although that sounds counterintuitive, to help reign in soaring inflation. With labour demand so high, wage growth has continued to grow, something the Fed doesn’t want to see. If we begin to see a weakening jobs market and lower wage growth, it may give the Fed an option to slowly ease back on its aggressive tightening policy. Like many data points this year, it will once again be bad news is good news for markets.
*Data accurate as of 30/09/2022.
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