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Episode details

Brendan Larsen
Good morning. It’s Monday 17th October and I’m Brendan from Milford asset management. It was once again another turbulent week for markets highlighted by Thursday’s s&p 500 trough to peak move of 5.3%. The largest intraday trading range since March 2020. The move occurred on the back of hotter than expected CPI in the US were headline CPI printed at 8.2%. There’s consensus at 8.1% most notably, Core CPI, which excludes food and energy and is generally considered a more reliable barometer of inflation increased 6.6% From a year earlier, the highest level since 1982. We continue to see a rotation from goods to services, with shelter costs reaching another consecutive record high month on month. This report likely sealed the deal for another 75 basis point hike from the Fed next month, and the market is now pricing a 66% chance of another 75 basis point hike for December versus just a 17% chance pre CPI. The initial market reaction was swiftly lower. However, this turned around and the s&p 500 closed the day up 2.6%. This seems counterintuitive at face value. However, the large turnaround is attributable to monetization of hedges, which caused large buy flow in the market as well as existing bearish positioning going into the print. This move was almost completely unwound on Friday as 10 year government bond yields again breached 4% in the US and the s&p 500 fell 2.4% and the UK focus continues to be firmly on policymakers. Earlier in the week, the Bank of England increased daily government bond purchases to 10 billion and an effort to provide stability to the market and assist UK pension funds in meeting margin calls. That temporary support ended on Friday. So this week begins without the safety net of the BOE acting as a backstop for for sellers. Elsewhere in the UK, we had the jobs report for August, which outlined a strong labor market. The number of employees on payrolls increased 69,000 almost double the consensus expectations of 35,000. Employment fell by 109,000. But a steep decline in activity pushed the unemployment rate down to 3.5% versus expectations of 3.6%. Despite this, there are some signs that the market is cooling as vacancies fell further in September. However, at 1.2 3 million vacancies remained significantly above pre pandemic levels. This further solidifies the case for a large rate hike from the BOE when they meet next month. With the market now pricing a 100 basis point increase. In Australia, we got to read on the consumer via the Westpac consumer confidence index. The headline level fell slightly to 83.7, which remains in deeply pessimistic territory, and is comparable to lows witnessed during the COVID pandemic and the GFC. Interestingly, Westpac note the RBA decision to hike by 25 basis points instead of 50 basis points save the index from falling materially further interviews conducted pre RBA when it was widely thought the RBA would hike 50 basis points showed a decline in index level to 77.4. Whereas the interviews conducted after the RBA hiked by a smaller 25 basis points showed slightly better sentiment and equity news cuantas surprised the market by guiding to underlying profit before tax of 1.2 to 1.3 billion for the first half of 2023, which compared to consensus at just 467 million. For context, the huge upgrade to first half numbers is above the entire FY 23 market consensus of 1.1 billion and almost as much as it made in the full year before COVID disrupted the business. Unsurprisingly, shares rallied 8.7% On the day, the biggest gain in two and a half years. Financials outperform the broader Australian market last week after bank of Queensland outlined the degree of REITs leverage across the sector. Despite missing consensus slightly on FY 22 Cash earnings of 508 million, the stock rallied more than 11% given bullish management commentary on FY 23 net interest margins. Management indicated that the exit net interest margin was above fourth quarter net interest margin of 1.81%, which was taken very positively by the market. Shares of Baby Bunting fell over 20% On Tuesday, after the AGM update indicated 230 basis points of gross profit margin compression of this compression 60 basis points was driven by poor execution of the Loyalty Program, or the balance was driven by factors such as domestic freight rates, effects, headwinds, and decreased demand on Play gear. New Zealand listed RV operator tourism holdings was the best performer on the index 50 Last week after the business upgraded FY 23 net profit after tax to greater than 33 and a half million from a range of 17 to 30 million. The upgrade was driven by greater certainty of afford rental revenue for the upcoming busy season, as well as greater rental yields given ongoing supply chain disruptions impacting obviously saleability.

In the week ahead UK policy will continue to be in focus while we also get a read on the inflation situation there were expectations of for a 10% headline CPI print and a 6.4% core CPI print. We will also be watching New Zealand CPI with the market expects and moderation to six and a half percent year on year versus 7.3% in the second quarter. In Australia, we get the September employment report and RBA minutes for the October policy meeting. Thanks for listening. We’ll see you again next week.

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