Market Update 6 May 2022

Source: Bloomberg, FXStreet, AMP
Source: Bloomberg, FXStreet, AMP

Investment markets and key developments over the past week
It was a turbulent week for markets after the US Federal Reserve raised interest rates by 0.5% at its May board meeting. This outcome was expected by the market and economists and the market actually rose from comments by Fed Chair Powell that 0.75% rate rises was “not something that the committee is actively considering” which alleviated fears of an extremely aggressive short-term rate hike profile from the Fed. The market pushed out US interest rate hikes out further over the next 1-2 years, with US interest rates now expected to reach close to 4% in a year which looks too elevated (we think rates will peak closer to 3%).

The initial post-Fed rally was more than reversed the next day, with US shares still 0.4% higher over the week but around 10% below their March peak (with the tech heavy NASDAQ faring even worse, down by 22% since its early-2022 high). Australian shares are 3.4% lower over the week, but have outperformed over the past few months compared to global counterparts because of our lower relative tech weighting and high commodities exposure. Globally, Eurozone shares were 2.8% lower this week, Japanese shares were 0.2% weaker (although markets were mostly closed this week for the national holiday of Golden Week) and Chinese shares were down by 0.7% (although markets were also mostly closed because of the Labor Day public holiday).

In the short-term, the outlook for shares is still messy and there may be more downside as markets worry about a significant economic slowdown or “hard landing” and aggressive interest rate hikes but signs of US inflation peaking and solid economic fundamentals (strong labour market, high accumulated savings) should be positive for shares on a 6-12 month view.

US 10-year bond yields rose over 3% this week, with Australian 10-year yields also breaking out over 3%. The $A rose to 0.71 USD and many commodity prices rose again. Oil prices are back around $110/barrel after the EU confirmed that it would move to ban Russian oil imports over the next 6 months and gas prices also moved higher.

US March quarter earnings season is nearly complete with 87% of companies having reported. Earnings growth is robust, with around 78.8% of results beating expectations. Annual earnings growth is running at 10.6% over the year. Solid earnings outcome explains the ability of companies to pass through higher prices to consumers.

Most global April manufacturing and services PMI’s have now been released and show some slowing in global manufacturing momentum (see chart below), although activity is still positive and is moderating from very high levels.

Source: Markit, AMP
Source: Markit, AMP

Services activity also slowed a little in April, with a fall in the US and China. While China’s Covid lockdowns are causing some disruption to global supply chains, the impact to economic activity is arguably more muted compared to history, with PMI’s in most countries not showing big falls despite the reliance on Chinese manufacturing. This could suggest that the world is becoming more immune to Chinese-related Covid disruptions. This would be good news for long-term supply issues and related inflation.

Supplier delivery times in the PMI data are also slowly improving despite the issues in China – although still have a long way to go to get back to “normal”.

Source: Markit, AMP
Source: Markit, AMP

Our own pipeline inflation pressure indicator continues to moderate (see the chart below), which includes things like commodity prices, shipping costs and delivery times.

Source: Bloomberg, AMP
Source: Bloomberg, AMP

Coronavirus update 

Source:, AMP
Source:, AMP

Global coronavirus cases continue to trend down and are back at late 2021/early 2022 levels (see the chart below), with declines in Europe and Asia. US cases have started to tick back up but are way down from the January peak. Cases in China are lower compared to the April high but are still elevated for China, tracking at around 25K new cases/day. New deaths are way down and are back down to levels first reported at the start of the pandemic.

In Australia, cases are also trending down and are well below the recent peak in April, tracking at around 38K new cases/day.

Source:, AMP
Source:, AMP

Economic activity trackers

Source: AMP
Source: AMP

Our weekly economic activity indicators improved this week across the US, Australia and Europe. In the US, mobility improved, restaurant bookings rose, weekly retail sales lifted, rail freight loads improved and mortgage applications rose (despite higher interest rates!). In Australia, the tracker improved from higher restaurant bookings, stronger credit card spending, higher mobility and stronger retail food traffic. Job advertisements are moderating from very high levels. The lift in the European activity tracker was due to higher mobility and better food traffic. Hotel bookings fell in Germany, France and Spain but picked up in Italy.

Major global economic events and implications
The US Federal Reserve lifted the fed funds rate by 0.5% at its May board meeting to a target range of 0.75-1% and signalled that it will hike by 0.5% again at the next few meetings. It will also start “quantitative tightening” or reducing the value of its balance sheet by allowing its treasury bonds and mortgage-backed securities to roll-off the balance sheet once they expire. The Fed will begin with allowing $47.5bn expire from the balance sheet in June, increasing that to $95bn in three months’ time. The market sees the fed funds rate reaching close to 4% by mid-2023 (see the chart below) which looks a little too aggressive given signs that inflation may start to slow down from here.

US non-farm payrolls rose by a solid 428K in April (expectations were of a 380K lift) but the unemployment rate was unchanged at 3.6% (expectations were for a decline to 3.5%, with the unemployment rate taken from a different labour force survey than the non-farm payrolls) and the participation rate declined by 0.2% to 62.2%. Average hourly earnings remain high, at 5.5% over the year to April. Overall, there was nothing in the April labour force data to change the Federal Reserve’s view about the shape of the US labour force or strength of the consumer.

Source: Macrobond, AMP
Source: Macrobond, AMP

The US manufacturing ISM index disappointed expectations and was down by 1.7 percentage points to 55.4 in April (although this still indicates “rising” activity, just at lower levels compared to last month. New orders were down, the employment sub-index fell, inflation is still a problem for firms, Chinese lockdowns are impacting supply chains but there was noted improvement for supply for larger scale items. The April ISM services index also disappointed expectations, coming in at 57.1 versus expectations of 58.5 and below February’s 58.3 reading.

March factory orders were up by 2.2% in March, above expectations and March job openings were up to a record high (at 11.5m), with the job openings rate at 7.1% of employment (well above the unemployment rate at 3.6%) and the quits rate rising to 3%, which is at its post-pandemic peak.

In the Eurozone, the March unemployment rate was down to 6.8% (from 6.9%) last month, in line with market expectations.

In the UK, the Bank of England Monetary Policy Committee hiked interest rates by 0.25% to 1% (with 3 members of the Committee favoured a 0.50% lift in May versus 6 who favoured a 0.25% rise). Further interest rate rises are likely over coming months as the UK also deals with a high inflation environment.

In NZ, the March quarter employment data came in line with consensus. Employment was up by 0.1% and the unemployment rate was 3.2%, unchanged from last quarter.

In China, the Caixin services PMI fell more than expected to 36.2 in April (expectations were for 40) and lower than last month’s reading of 42. The weakness is related to the lockdowns which are predominantly in Shanghai.

Australian economic events and implications
The RBA delivered a 0.25% increase to the cash rate at its May board meeting, which was a “surprise” in the sense that the market and economists were looking for a 0.15% lift (we were expecting a 0.40% increase). This takes the cash rate to 0.35% from 0.1%. The RBA also announced that it will start quantitative tightening, by allowing the bonds on its balance sheet to run down as they mature, which will shrink the size of its balance sheet. Clearly the central bank wanted to quickly get on top of the breakout in inflation (perhaps after seeing the issues with high inflation in the US). The RBA’s commentary was also more hawkish than expected, citing a big lift in its inflation forecasts and committing to do “what is necessary to ensure inflation in Australia returns to target over time”. This signals an aggressive profile for interest rates over the next 612 months. We expect a follow-up rate hike of 0.4% in June and for the cash rate to end the year between 1.5-2% and 2-2.5% by mid-2023.

Of course, the risk with rate hikes is around the impact on the housing market because higher interest rates will add to the cost of living for households at a time when inflation is rising (see chart below of the rise in fixed rates recently), especially for “essential” items like food, petrol and electricity. Ultimately, weakness in consumer spending and lower home prices will act as a handbrake on future RBA rate increases.

The release of the RBA’s forecasts in the quarterly Statement on Monetary Policy showed a big upward revision to inflation with the central bank now expecting a peak in headline inflation of 6% by year-end (from 3¼% three months ago) and 4¾% for the trimmed mean (from 2¾% three months ago). This is a big shift in forecasts. Our inflation projections are similar. GDP growth is expected to slow in late 2023 as interest rate hikes slow economic activity (the RBA’s forecasts take into account projected interest rate movements from consensus expectations and financial markets).

In terms of other data in Australia this week, the Westpac/Melbourne Institute monthly inflation gauge saw a slight tick down in the annual trimmed mean measure in April.

ANZ job advertisements fell by 0.5% in April, but are still elevated compared to a year ago and show further upside to employment growth in coming months, weekly ANZ Roy Morgan consumer confidence fell further over the week to 1 May and is now back to the lowest level since August 2020. Dwelling prices, according to CoreLogic rose by 0.3% in April across the 8 capital cities but this masks a wide divergence across cities and regions, with Sydney prices down by 0.2%, Melbourne flat, other capital cities having solid gains like Adelaide (+1.9%) and Brisbane (+1.7%) and the regions up by 1.4%. March retail sales was stronger than expected, up by 1.6% with increases across all categories, particularly in household goods (+3.4%), “other” retailing (+2%) and eating out (+2%). March housing lending data was also solid and showed a lift of 1.6% in new loans, with a big rise in investor lending (up by 2.9% over the month).

March building approvals were down by 18.5% over the month, slightly higher than the 12% forecast by economists but the large fall is because of some statistical payback from the 43.5% lift in February which reflects the volatile nature of building approvals and is also probably related to some covid-related disruptions in the approval process. House approvals remain on a downtrend (and fell by 3.1% in March), following the expiration of the government’s HomeBuilder scheme last year. Apartment approvals plunged by 37.7% in March but look to be trending sideways. A rebound in immigration should be positive for apartment construction.

 Source: Bloomberg, AMP
Source: Bloomberg, AMP

March trade data was stronger than expected, with the trade surplus rising to $9.3bn (from $8.4bn last month). Total exports fell by 0.1% in March but imports fell by more (-4.6%).

What to watch over the next week?
In the US, April non-farm payrolls (released on Friday) should show another strong employment report of 385K (which is below the March figure of 431K), with the unemployment rate declining further to 3.5% and average hourly earnings growth slowing to 5.5% over the year (from 5.6% March). April consumer price data (released on Wednesday) will show a smaller rise in headline prices (consensus looking for a 0.2% rise from 1.2% in the prior month) as commodity prices have cooled from March highs (although are still elevated). Core consumer prices are expected to rise by 0.4%, which is solid but below the peak increases in December/January. Producer price data also released next week is expected to rise by 0.5% in April. The University of Michigan consumer sentiment survey is expected to show another low reading, around its lowest levels since late 2011.

Australian data includes the March quarter volume retail sales data which we expect will show a rise of 1.1%, making a small contribution to March quarter GDP growth. The April NAB business survey may show some weakening in business confidence and conditions because of uncertainty around rate hikes and global inflation concerns despite businesses reporting good outcomes in recent months. In contrast, consumer confidence has been weakening and there will be an update on consumer sentiment in Wednesday’s release.

Around the rest of the world, it is a quiet week. Europe data includes the May ZEW survey of financial market participants outlook, which fell to its lowest level since the start of the pandemic in 2020. March industrial production data is also released.

In the UK, March quarter preliminary GDP is released and is likely to show some slowing from the 1.3% pace last quarter.

In Canada, the April unemployment rate should fall slightly to 5.2% from 5.3% last month with another decent jobs print.

And in China, the April trade surplus is expected to widen to around $48.4bn US dollars. Export growth is expected to lift over the year but imports are likely to have a small fall because of weaker domestic demand related to lockdowns. April consumer and producer price data is expected to show a lift in consumer prices to 1.9% over the year (from 1.5% last month) and 7.5% for producers (lower than the 8.3% last month) but this is well below current price growth in global counterparts.

Outlook for markets
Shares are likely to see continued short term volatility as the Ukraine crisis continues to unfold and inflation, monetary tightening, the US mid-term elections and geopolitical tensions with China and maybe Iran impact on markets. However, we see shares providing upper single digit returns on a 12-month horizon as global recovery continues, profit growth slows but remains solid and interest rates rise but not to onerous levels at least for the next year.

Still low yields & a capital loss from a further rise in yields are likely to result in negative returns from bonds.

Unlisted commercial property may see some weakness in retail and office returns (as online retail activity remains well above pre-covid levels and office occupancy remains well below pre-covid levels), but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.

Australian home price gains are likely to slow further with average prices falling from mid-year as poor affordability, rising mortgage rates and rising listings impact. Expect a 10 to 15% top to bottom fall in prices from mid-year into 2024 but with a large variation between regions. Sydney and Melbourne prices have likely already peaked.

Cash and bank deposits are likely to provide poor returns, given the ultra-low cash rate of just 0.35% at present but it should rise as the RBA raises interest rates.

A rising trend in the $A is likely over the next 12 months helped by strong commodity prices, probably taking it to around $US0.80.

Diana Mousina

Economist – Investment Strategy & Dynamic Markets


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