16 JAN 2023 – Monday Market Highlights – Transcript

Will McVeagh
Good Morning, Welcome back to the Milford Monday morning highlights for 2023. We hope you had a good break and all the best for another year in the markets. I’m Will from Milford, and this is your podcast for Monday the 16th of January

Markets have started the year strongly with the NZX 50 up 2.5%  and the ASX200 and S&P 500 up over 4% year to date. Thematically we start the year where we left off, with a key focus on inflation, and the policy reaction by global central banks. Data last week gave us some more insights into the current situation.

Last Thursday we got the US December CPI print that came in at 6.5%, inline with expectations. Services inflation remains strong while goods inflation printed a negative number for the 3rd month in a row as supply chains ease. Also as expected, energy prices dropped sharply after the massive jump post Russia’s invasion of Ukraine, with this category being the biggest detractor in the release. While there is still plenty of play out in the US, it does appear that the rapid rate rises are having impact in getting inflation under control and opens the door for a soft landing scenario where inflation drops without triggering a recession. Post this print, a number of voting fed members were out pushing the view that a 25bps rate hike would be appropriate at their February meeting.

In Australia we also got a stack of economic data. The November monthly CPI came in at 7.3% just above the market expectations and higher than the 6.9% in October. Again, inflation was led by Housing, food and beverages, transport, and furniture. This monthly CPI series should be treated with some caution, as it is a relatively new series where not all components are updated every month. Fourth Quarter CPI will be released on the 25th of January, which will give a more definitive read on Australian inflation, however these monthly prints do point to upside risk.

Retail sales came in at a monster 1.4%, beating expectations of 0.6% in November and seeing a upward revision to the prior month. Much of the jump was driven by the black Friday sales period which has become more important over recent years. Some of this could be seen by the weak October print which many expect was consumers waiting till Black Friday sales to spend. As you’d expect, Clothing, footwear, and personal accessories, and department stores saw the largest jump in November. It will be interesting to see in the December print how much, if any, of the November boom was a pull forward of Christmas and boxing day spending.

Given the CPI and retail sales data from last week, it will put pressure on the RBA to continue hiking rates. It’s clear that the consumer isn’t currently having to reduce spending in the face of the rapid rate rises we saw last year, which likely means the RBA has to keep hiking rates till it hits consumers back pockets.

Insurer IAG provided a update to the market last Monday where their catastrophe reinsurance costs increased 20-25% for FY23. The frequency of extreme weather events keeps pushing the costs up, which invariably get passed through to policy holders. In addition they also announced a 7 year renewal with Berkshire Hathaway on their whole of account quota share to take them out to 2030.

US banks JPM, Citi, Bank of America and Wells Fargo all reported their results on Friday night. JPMorgan missed on investment banking revenue and also fell short on sales and trading. It will resume stock buybacks this quarter but said this year’s net interest income will be lower than analysts expected. Citi beat on Fixed income sales and trading but missed on equities and investment banking revenue. Bank of America net interest income disappointed but its traders beat while Wells Fargo’s revenue fell short of consensus. All 4 banks ended higher on Friday.

Origin is expected to announce an update on their takeover deal today, as due diligence ends for the consortium looking to take the company private. The consortium led by Brookfield and EIG have bid for ORG at $9, and a binding offer and scheme should see the stock start closing the spread to terms. 

This week we will get the December Australian employment data on Thursday morning. Most expect the labour market to remain at record tight levels, with unemployment unchanged at 3.4%. It will be interesting however, to see if the large uptick in migration in recent months is starting to have an impact.

The US data front is quieter with retail sales, PPI and jobless claims.

Have a good week, thanks for listening.