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Episode details

Roland Houghton

Good morning. It’s Monday the first of November and I’m rolling from Milford. It was a busy week for Australian economics with the drama starting the higher than anticipated quarter three inflation print, headline inflation group 0.8% quarter on quarter, which was in line with market expectations. However, the surprise came from trimmed mean inflation or TMI, which grew 0.7% quarter on quarter. This took annual trimmed mean inflation to 2.1%, the highest level since 2015. Now this is important because it breached the lower end of the RBAs two to 3% target band, and this came two years earlier than they were forecasting. Remember, TMI is a measure of underlying inflation which excludes large one off price impacts such as free childcare. This outcome alone, so bond yields increase across the curve as the price of bonds sold off on the anticipation of rising inflation and hence rising rates. This was further exacerbated however, by some bizarre behavior by the RBA. They had been tapering and had been targeting the April 2024 bond. This means they were buying billions of this bond to keep the yield of it down and therefore stimulate the economy. Every morning they announced the amount they tend to purchase but on Wednesday, Thursday and Friday, they informed the market they wouldn’t be purchasing any bonds. The conclusion being drawn was that the RBA is now going to quickly wind back its tapering on the back of its heightened inflation. However, it is very strange to do this without formally communicating this to the market first. The 10 year yield increase from 1.8% over 2%. The five year bond yield increase from 1.19% to 1.55%. And the yield on the April 2024 bond the bond the RBA was supposed to be controlling increase over five times last week. Third quarter US GDP data came in way below expectations with the US economy growing 2% quarter on quarter verse expectations of 3.5%. This was a big slowdown, especially in the context of the 6.7% achieved in the June quarter. This was driven by a sharp slowdown in consumption that makes up 69% of the US economy. This only grew at 1.6% slowing from the 12% increase in q2. This is likely driven by higher inflation, a wave of COVID cases supply chain issues and fewer stimulus checks from the government. Turning to equity news, Telstra announced the acquisition of Digi sell a Pacific Island telecommunications business with a big skew to Papua New Guinea. This acquisition was very politically driven as the Australian government didn’t want such a strategic set of assets falling into the hands of the Chinese. Telstra will pay us $270 million and we’ll own 100% of the equity of this business. The government will fund the remaining 1.3 billion 720 million of which is debt. Analysts expect the deal to be low single digit earnings accretive and mid to high single digit free cash flow creative. US earning season is in full swing, and although there are myriad of companies to talk to, we will focus on a couple of the better known businesses for example, Apple shares fell 1.8% as sales came in at 83 Point 4,000,000,001st expectations at 4.8 billion. This Miss occurred and both the iPhone and accessories division. CEO Tim Cook put the majority of the blame down for supply chain issues. Unfortunately, he said the impact will be even worse than the December quarter. Amazon also fell 2% On Friday, as it missed expectations of earnings per share coming in at $6.12 with expectations of $8 92/4 Quarter guidance was also weaker than expected with Amazon guiding to 130 240 billion of sales versus expectations of 142 billion. Tesla also had a big week rising 22% On the back of a deal with Hertz. Hertz will initially buy 100,000 Tesla’s to add to the US and European rental fleet. The deal is worth us $4.2 billion. So Tesla added $205 billion to its market cap on the back of a $4.2 billion deal. Now people will be assuming more of these deals will fall however, this is quite an astonishing development. Now looking to the week ahead, it’s very busy on the economic front. The RBA is meeting on Tuesday is extremely important. This is because they will articulate the path for interest rates and their tapering intentions bearing in mind they’ve very bizarrely stepped out of the market completely last week. In the US you have the market manufacturing PMI and the isn manufacturing PMI. These are expected to contract slightly to 59.2 and 60.5 respectively. Remember, if the index remains above 50, it implies these sectors are still expanding. Later in the week. You also have the Fed interest rate decision and the Fed press conference which as per usual will be closely analyzed. Finally, in the US non farm payrolls and the employment data for October will be released. The market expects 413,000 new jobs be added and the unemployment rate to contract to 4.7%. Thanks for listening. We’ll see you next week.

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