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Inflation concerns, employment growth and reporting season.

Global equity markets saw muted trading last week with the US market closed on Monday for President’s Day and China’s Shanghai Stock Exchange closed until Thursday for Chinese New Year.

As a result, global equity markets struggled to find a clear direction with the MSCI World Index eventually closing down -1.8% in AUD terms.

Strong retail sales data in the US which surged +5.3% in January outpacing estimates of a +1.2% rise was offset by a weaker than expected Labor Department report which showed claims for state unemployment benefits rose to 861,000 last week.

Meanwhile, minutes of US Federal Reserve officials’ meeting last month show they debated how to prepare the public for higher inflation. They also discussed the need to “stay vigilant” for signs of stress in buoyant asset markets.

US Treasury yields continue to rise amid increased optimism that President Joe Biden and congressional Democrats will authorise more fiscal relief measures which would in turn speed up the economic recovery.

Whilst January’s CPI data weakness in the US tempered short-term inflation expectations somewhat, inflationary risk reared its head again last week with yields on 10-year Treasury notes reaching a 1-year high of 1.3%.

High inflation brings the two-fold risk of weighing on spending given purchasing power is reduced as well as the earlier-than-anticipated scaling back of monetary policy support by central banks.

Given the Federal Reserve remains committed to its monthly purchases of US$120b of Treasuries and will continue doing so until the economy has made “substantial further progress” toward full employment and its 2% inflation target we think equity markets will remain well supported in the medium term.

Unemployment Rate

Australia’s employment recovery continued in January, with the country recording its fourth consecutive monthly jump in job creation – a trend many would have considered highly unlikely only six months ago when the unemployment rate touched 7%.

The data is undeniably positive and the economic recovery remains well and truly on track.

January’s unemployment data showed 29,100 jobs were created over the month, cutting the unemployment rate to 6.4% from 6.6% and ahead of expectations of 6.5%.

Pleasingly, the increase of 59,000 full time jobs compared to the 29,800 fall in part time work led to a fall in the underemployment rate which fell to 8.1% – back below pre-pandemic levels.

Underemployment refers to workers actively seeking more hours of work in a given week. An increase in full-time numbers and decrease in part time numbers suggests workers on reduced hours throughout the pandemic are now getting more work.

The declining jobless rate will help boost confidence just as the government prepares to withdraw fiscal stimulus to ailing businesses and workers.

While still well above the 5.1% seen before coronavirus, unemployment is now comfortably below the peak level of 7.5% seen in July last year.

The RBA is now expecting the unemployment rate to decline to around 6% by the end of 2021, before reaching 5.25% by mid-2023.

Westpac leading index

The six-month annualised growth rate in the Westpac Leading Index rose from 4.24% in December to 4.48% in January.

The index which highlights the likely pace of economic activity relative to trend three to nine months into the future continues to point to above trend growth in the Australian economy through 2021.

In its February Statement on Monetary Policy the Reserve Bank forecast growth of 3.5% for 2021, almost in line with the Westpac forecast of 4%. With population growth forecast to slow to 0.2% in 2021 compared to 1.5% in 2019, both forecasts represent significant above trend growth.

The Reserve Bank Board next meets on March 2 with decisions around a further extension of the bond buying program; the continuation of the Yield Curve Control policy; and the Term Funding Facility (TFF) to be actively monitored based on inflation, wages, employment and bank liquidity. 

ASX weaker & reporting season update

A disappointing Friday saw the ASX200 erase all its gains ultimately falling -0.2% for the week.

Miners and the banks fared best rising +1.8% and +0.5% respectively whilst consumer staples and utilities were weaker falling 3-4%.

Coles Group (COL) accounted for much of the consumer staples weakness falling -10% for the week after releasing 1H21 earnings numbers which were slightly disappointing.

Whilst COL delivered in-line 1H21 results, with cash conversion strong at 120%, sales momentum slowed and elevated underlying costs of doing business disappointed.

Importantly COLs cost-out program remains very much on-track with COVID costs continuing to ease (~$10m/month vs. ~$33m per month in 2H20).

An upbeat release from Morgan Stanley last week stated the number of companies who have delivered results so far above expectations has exceeded those that have fallen short.

The broker suggests companies that have ‘beat’ expectations have exceeded ‘misses’ by three times with dividend surprises adding to the positive momentum.

Fingers crossed this trend continues.

Updates from some of the big companies that reported last week:

• CSL – 1H21 CSL Behring sales rose +11%, with immunoglobulin revenue up +7% and Albumin sales up +93%. Seqirus revenue climbed +38% from strong influenza vaccines growth.
  
  FY21 guidance was unchanged whilst plasma collections are expected to improve with CSL plasma initiatives and COVID-19 vaccine rollout. This continues to be the key driver of the near-term outlook.

• WBC – 1Q21 update shows early signs of a turnaround, given improving franchise performance, a higher net interest margin (NIM), a “Cost Reset” plan to be announced in 1H21, and lower loan losses and provisions.
  
  Westpac reported a strong capital position with CET1 ratio of 11.9% with potential for further capital release from non-core asset sales. We expect to see stronger capital and better dividend recovery for FY21.

• WES – Wesfarmers reported a half-year net profit of $1.4b, up from $1.2b a year ago. Bunnings revenue and earnings increased by +24% and 36% respectively.
  
  Retail sales growth is expected to moderate somewhat from March as the businesses begin to cycle the initial impacts of COVID-19 in the prior year, particularly in Bunnings and Officeworks.
  
  Wesfarmers’ portfolio of cash-generative businesses with trusted brands and leading market positions is well-placed to deliver satisfactory shareholder returns over the long term

• STO – FY20 results were in-line with expectations. Underlying profit is 280% stronger than 2016 at similar average oil prices and production growth is strong with volumes increasing by >40% since 2016.

Looking ahead

Monday 22th February – Friday 26th February 2021

• Monday: N/A
• Tuesday: CN House Price Index (JAN), US Chicago Fed National Activity Index (JAN), UK Unemployment Rate (DEC)
• Wednesday: AU Wage Price Index (Q4), US House Price Index (DEC)
• Thursday: US New Home Sales (JAN)
• Friday: AU Private Sector Credit (JAN), US Durable Goods Order (JAN), Weekly Jobless Claims

Friday 19th February, 5pm values

Friday 19th February, closing values

Key dividends

Monday 22th February – Friday 26th February 2021

• Monday: Div Ex-Date – Ansell Limited (ANN), Netwealth Group (NWL), Tabcorp Holdings (TAH)
  Div Pay-Date – CGFPB (CGFPB), Djerriwarrh (DJW
• Tuesday: Div Ex-Date – Amcor (AMC), Challenger Limited (CGF), Santos Limited (STO), Wesfarmers Limited (WES)
  Div Pay-Date – Australian Foundation Investment Company (AFI)
• Wednesday: Div Pay-Date – AGL Energy Limited (AGL), Downer EDI Limited (DOW), Iress Limited (IRE), Telstra Corporation Limited (TLS)
• Thursday: Div Ex-Date – Baby Bunting Group Limited (BBN), Beach Energy Limited (BPT), Breville Group Limited (BRG), JB Hi-Fi Limited (JBH), Pact Group Holdings (PGH)
  Div Pay-Date – Goodman Group (GMG), Magellan Financial Group (MFG)
• Friday: Div Ex-Date – Coles Group Limited (COL)
  Div-Pay Date – Charter Hall Group (CHC), Dexus (DXS), Scentre Group (SCG), Stockland (SGP), Waypoint REIT Limited (WPR)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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