The ASX200 finished down 0.06% after a turbulent week for global markets. Financial stocks did most of the heavy lifting last week, with the sector rallying more than 3%, but tech was the worst-performing sector falling by 3%. US stocks saw historical intraday movements throughout the week, with the S&P500 finishing down 1.55%, and the Hang Seng had a horrible week, dropping by 6.5% and falling below a key technical level of 17000.
3 things that happened last week:
1. US Inflation – A big disappointment, but markets react well
Heading into last week’s US CPI reading, investors had high hopes that inflation would show signs of easing, but that, unfortunately, wasn’t the case. Instead, core US prices surged to a new high of 6.6%, above their March peak, and likely solidify’s another big rate hike from the Federal Reserve on November 2nd. Headline September inflation eased to 8.2%, a third consecutive decline, as gasoline prices fell further. But the Fed’s concern is on sticky underlying inflation, which rose a dramatic 0.6% versus last month alone, driven up by services and housing costs and underlying wage strength. However, after initially dropping on the news, markets reversed to finish higher with the belief that all inflation lead indicators from commodities to supply chains, housing, and the jobs market are now easing, signalling less inflation pressure ahead.
2. Westpac Consumer Confidence Survey – Consumers feeling the most pessimistic we’ve seen in years
The 25bps increase from the Reserve Bank of Australia (RBA) in October helped consumer confidence from falling to its second-weakest reading since 1990. The lowest level of consumer confidence in this period is still the significant drop that occurred during the initial pandemic shock in April 2020. As the cost of living crisis eats into household budgets, and interest rate rises see mortgage payments soar, a 50bps move from the RBA has likely left consumers feeling the most pessimistic we’ve seen in years. However, the latest decision from the RBA to slow down its rate hike cycle has helped investors to rally behind the belief that a recession in Australia is avoidable. For the time being, retail sales remain strong despite this weakness in consumer confidence, but this won’t last forever. With the RBA likely to continue raising rates over the next few months, confidence and retail spending could still be set to tumble.
3. A winner and loser last week from the S&P/ASX200
It was a great week for Qantas (QAN), with the airliner gaining 8.41% after a trading update on Thursday. The company expects underlying profit before tax of between $1.2 billion and $1.3 billion for the first half of fiscal year 2023.
It was a tough week for Pilbara Minerals (PLS), as the lithium miner fell 13.47%. It comes after a bearish report from Morgan Stanley that cited lithium demand in china was falling. With the stock climbing more than 100% in the last year, investors felt it was time to take some profit off the table.
*All data accurate as of 16/10//2022. Data Source: Bloomberg and eToro
3 things to watch for the week ahead:
1. RBA Minutes: The only central bank slowing down
The Reserve Bank of Australia surprised markets with its 25bps rate hike at its October 4th meeting. The minutes from that meeting will be released on Tuesday this week (18th October). The RBA’s sixth consecutive rate hike brought the cash rate to 2.6%, and expectations are for another two 25bps hikes at the November and December meetings. The RBA was the first major central bank in this current tightening cycle to pivot and slow down the pace of its rate hikes. In the minutes released this week, we will likely receive further insight into the decision from the board in making this decision. The RBA likely wanted to slow down the current cycle for rate hikes to have their desired effect, especially amid a decline in the housing market and the pressure rate hikes are having on local households. However, the previous commentary from the RBA was that they are determined to bring down inflation, which could mean further rate hikes into 2023 if inflation remains high.
2. AU Unemployment: No signs of cooling
Last week the International Monetary Fund (IMF) downgraded its growth outlook for the global economy, so will this slowly affect the Australian labour market? On Oct 20, Australian jobs data will be released, with the unemployment rate set to remain tight with forecasts of 3.5%, in line with August and slightly up from July’s record low of 3.4%. The jobs data is a key metric for investors to watch as it’s a sign of the economy’s strength and, importantly, if the RBA’s rate hikes are having the desired effect in cooling demand. However, the labour market is showing very few signs of slowing down, with participation near record levels. This could see the unemployment rate fall further heading into the end of the year, meaning the RBA may ramp up their hikes again.
3. China in focus this week: Australia will be watching
It’s a big week in China, with a data dump, and the Chinese Communist Party convenes for its national congress on October 16th. Xi Jinping is expected to be named the country’s leader for a third five-year term. The focus from the event for investors will be any indications over the future path of policy in what is currently a difficult period for the Chinese economy. On top of this, although unlikely, any indication that the government may be ready to tone down its tough stance on Covid-19 could provide a boost to Asian markets. Away from the national congress, we receive a slew of Chinese economic data, including Q3 GDP, retail sales, industrial production and jobs data, all of which will give further insight into the Chinese economy. Its tough Covid-zero policy has a massive grip on the Chinese economy, and expectations for the quarter are for growth of 3.5% year-over-year. Although this would signify an increase from August, it is well below the 4.8% projections from August. With China being our biggest exporter, Australia will be watching.
Bonus: The first big tech names in Q3 Earnings Season
This week, Netflix (NFLX) and Tesla (TSLA) are both set to report their Q3 earnings. Netflix kicks it all off on Wednesday after the US market closes. It’s been a torrid 12 months for Netflix, as subscribers turned negative for the first time in its history, and shares have fallen 63%. However, expectations are for Netflix to add just over 1 million subscribers for the quarter, with the Asia Pacific region set to do most of the heavy lifting. We can also expect to hear more regarding Netflix’s ad tier subscription model that is set to roll out in November. Expectations are for earnings of $2.12. Then on Thursday, after the US market closes, Tesla is expected to hand down its Q3 results. After falling short of delivery expectations a few weeks ago, Elon Musk will be looking to deliver a strong result. The focus for investors from the earnings call will be on consumer demand, given the weaker delivery numbers, production capacity and the drama surrounding Musk’s Twitter deal. Consensus has Tesla earnings at $1.04 for the quarter.
*All data accurate as of 16/10//2022. Data Source: Bloomberg and eToro
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