Surging US inflation tries to derail investor optimism

Blog
Friday 12th November 2021

Surging US inflation tries to derail investor optimism

Blog
Friday 12th November 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets had a very mixed week with the surge in US inflation spooking US equity investors, other developed markets recovered to finish flat, whilst some Asian and emerging markets rose.
  • In local stock news, Sydney Airport has agreed to accept a $23.6 billion takeover bid ($8.75 per share) from an infrastructure investor group in one of Australia’s biggest ever buy-outs. The deal still has to clear regulatory hurdles including competition and foreign ownership.
  • National Australia Bank reported full-year cash earnings of $6.5 billion in the year to September 30, with the bank doubling its final dividend. The bank’s revenue declined by 2.2% over the period but saw a 6% overall growth in loans with a 7% rise in business lending and 4% in mortgage growth.
  • Fertiliser and chemicals producer Incitec Pivot will stop manufacturing at its Gibson Island plant in QLD by the end of next year as gas costs have made the plant unviable. The costs of closure and write-downs will be about $186 million, some of which may be offset by land sales.
  • James Hardie improved 2nd quarter earnings after strong sales in North America, with the company increasing its full year earnings guidance to between US$580-600 million. 
  • In Merge & Aquisition news, Wesfarmers entered a merger agreement with Australian Pharmaceutical Industries after Sigma Healthcare called of its bid; BHP sold its metallurgical coal joint venture in QLD which will see them sell their 80% stake to Stanmore Resources for about US$1.1 billion; gold miner Newcrest announced a $3.7 billion for Canadian miner Pretium Resources which will boost Newcrest production by 300,000 ounces per year.
  • The Aussie dollar fell sharply against the US dollar on the back of US inflation rocketing higher which puts additional pressure on the US central bank’s policy normalisation path.
  • Oil had a topsy-turvy week, rising to more than US$84 a barrel on reports of US oil stock declines and the US reopening international travel, before falling away to finish the week lower on speculation that President Biden would order a release of supply from their strategic reserves and with Democrats calling for oil export bans.

Economics:

  • The Reserve Bank of Australia’s November meeting statement saw the bank upgrade their forecasts for inflation and wages whilst they now expect the unemployment rate to fall to 4% by mid-2023. They have inflation reaching 2.5% (middle of their target) in Q4 2023 with wages growth to lift to 3% by the end of 2023. This is consistent with them raising rates end of 2023 / early 2024, which is in stark contrast to the market which has them raising rates in 2nd half 2022.
  • Australian big banks are lifting borrowing rates on fixed rate loans with CBA the latest to do so, following in the steps of Westpac and NAB. The moves come after short term government bond yields rose aggressively over the last few weeks making it more expensive for banks to source funding.
  • Australian employment fell by 46,300 in October driven by lower employment in VIC and ACT. The participation rate rose in the month and the unemployment rate moved higher to 5.2% from 4.6%. Leading indicators appear to suggest a strong rebound in employment in the coming months.
  • National job ads are at their highest level in Seek’s 23-year history, with ads jumping more than 10% in October on the previous month amid a skills shortage caused directly by lockdowns, workplace restrictions, and closed state and foreign borders.
  • Australian home auction volumes remain high, but clearance rates have declined in recent weeks down to 76% from a peak of 83%. Housing supply has picked up NSW and VIC as lockdowns ease, whilst high prices have pushed some first home buyers out of the market.
  • Australian consumer sentiment lifted by 0.6% in November driven by a strong rise in NSW, whilst there were large declines in sentiment in SA along with QLD and TAS. Overall, sentiment remains below the peak of April 2021 but above average levels.
  • Australian business conditions and confidence lifted in October which was to be expected given the lifting of some restrictions. NSW drove the increase in business conditions whilst VIC led the lift in business confidence. Key to the surveys were an indication that pricing pressures were continuing to build reflecting global supply chain issues and rising labour costs locally.
  • The US economy added 531,000 jobs in October, the most in 3 months and above market forecasts for 450,000, as employers offered higher wages and more flexible hours. Labour shortages continue to weigh.
  • The annual inflation rate in the US surged to 6.2% in October, the highest reading since November 1990 and above forecasts of 5.8%. The increase was broad-based with energy costs recording the biggest gain. There were also strong increases in food, new vehicles, and used cars & trucks. 
  • The US producer price index rose by 0.6% in October to be up by a record 8.6% on the year. The core price index was a record 6.8% higher on a year ago. Both in line with expectations.

Politics:

  • The US House passed a more than US$1 trillion bipartisan infrastructure bill, a significant reduction in size on what the Biden administration wanted, with President Biden saying the legislation will create millions of jobs. The problem in the US right now isn’t job creation, it’s job filling, with a huge number of job vacancies which is only exacerbating their inflation and supply bottle-neck problems.
  • China’s ruling communist party has passed a resolution enshrining Xi Jinping as one of its greatest leaders. The resolution gives Xi the political currency to rule over China indefinitely

Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concern