11 JUL 2022 – Monday Market Highlights – Transcript

Will McVeagh
Good morning. It’s Monday, the 11th of July and I’m Will from Milford trading was quieter last week as school holidays began in Australia, and a shortened trading week in the US with the Fourth of July holiday. Markets focus shifted this week from inflation to recession. Markets are now concerned that the sharp increase in interest rates by global central banks will lead to a recession in 2023. This translated to some large moves and global bond markets, where we saw a flattening in yield curves and inversion and the twos 10s and 510s. In the US. This means that the market expects rates to rise faster in the short term to combat sticky inflation, however, in turn leading to a recession, this will then cause central banks to have to cut rates sooner than previously expected. Driving the long end of the yield curve down, it’s clear that there is a large amount of uncertainty around this causing large swings in markets. Domestically last week, the focus was on the July RBA meeting, Governor Lowe decided to raise interest rates by 0.5% to 1.35%. In line with market expectations, there wasn’t a huge amount of new in the statement to move the market. However, there were a couple of points worth thinking about. Lowe mentioned the huge amount of built up savings in the economy from COVID stimulus, however, said the RBA is unsure how consumers are likely to react in the face of higher prices and interest costs. The central bank is betting on the fact that consumers can use these pin tap savings to offset higher mortgage costs from interest rate rises, rather than being forced to sell property or face financial hardship leading to a recession. He also noted that the RBA expects to continue raising rates, but the speed and size of these increases will be driven by upcoming data releases. We wait now for Australian CPI data on the 27th of July, and wage inflation data on the 17th of August for close to the path forward financial markets and now pricing a cash rate of 3.1% by year end and Australia. US Federal Reserve minutes on Thursday showed that the central bank remains concerned about controlling inflation, and will need to keep raising interest rates to get it under control. The FOMC noted that inflation remained high with a very tight labor market, which posed a threat that inflation could become entrenched as the public lost confidence in the central bank to raise rates quickly enough to control it. This was further reinforced by a strong jobs report on Friday night, beating expectations and showing upward revisions and wage growth, which increased pressure to tighten financial conditions rapidly. And the Fed minutes the committee noted that they saw a 50 basis point or 75 basis point hike in July to be likely. The market is currently pricing in 70 basis point of hikes in July to take the Fed funds rate to 2.3% with a year end rate of 3.35% priced stock news this week was light as many companies hit into blackout period ahead of reporting season in August. Listed skincare company BW X group were forced into a heavily discounted emergency raised last week to shore up the company’s balance sheet. They raised $23.2 million at 60 cents, a 49% discount to the pre deal price, which was to be used to repay debt that was at risk of breaching covenants. The company did recover somewhat post deal, finishing the week at 79 cents. However, it’s a huge fall from grace for a company that was trading about $5 Only a year ago. concerns remain however around a put option. That was part of the deal to buy Zoe foster Blake’s go to skincare brand that creates a liability for the company potentially as large as the market cap. This week, the key focus is on the US June inflation print on Wednesday night our time annual CPI is expected to rise from 8.6% to 8.8%. With month on month inflation ticking up to 1.1% from 1%. However, Core CPI is expected to a slightly from 6% to 5.8%. The market is now expecting we’re close to peak inflation, so strong print on Wednesday could see a sharp market reaction. In Australia, we will get the June employment numbers and what is expected to show a continuingly tight labor market. The unemployment rate is predicted to tech slightly lower to a record low of 3.8% from 3.9%. Previously, with the participation rate remaining elevated

in New Zealand, the RBNZ will announced their latest cash rate decision on Wednesday morning. Markets expect another 50 basis point hike to take the OCR to 2.5%. If they do hike by 50 basis points this month, it will be the fourth consecutive 50 basis. To point rate hike by the RBNZ and also to watch in the company space this week will be TPG Telecom, where a large portion of the shares on issue will come out of escrow. On Wednesday 64% of the company will become eligible to be sold with the split between founder David to and investors, Vodafone and Hutchinson. No one is sure if any of these holders will sell however, most of the focus will be on T O’s 14% stake as he is no longer on the board of TPG and sold a stake in December last year. Thanks for listening. Have a great week.