Weekly Market Update – 17 May 2021

Inflation rising whilst local data continues to improve

Given the rise in bond yields which have now risen steadily since August last year, Thursday morning’s US consumer price index (CPI) release was somewhat expected.

It stands to reason that pricing pressures increase given the unprecedented level of fiscal stimulus pumped into the financial system. Not to mention the fact that many recipients of welfare benefits in the US are currently receiving more money than their minimum wage would have otherwise entitled them to.

So, the expectation that inflationary pressures would spike at some point was more a question of when, not if.

US consumer prices increased by the most in over a decade in April on the back of booming demand. The headline index jumped to 0.8% from 0.6% the month prior which was significantly ahead of analyst expectations and the year-on-year inflation number now stands at 4.2% – a level not seen since 2008. 

Global equity markets were naturally weaker in response to the news with US Treasuries falling and tech stocks leading the way for equity market declines whilst the USD appreciated given it is largely regarded as a safe haven currency in times of market volatility.

The volatility index (VIX) climbed to a 10-week high before retreating somewhat as the Federal Reserve played down expectations of any near-term tightening of monetary policy.

US share markets had their worst week in 2 months last week falling -1.4% whilst the MSCI World Index in AUD terms fell -0.4% on the back of currency movements.

Interestingly, Friday’s Retail sales data was unchanged despite expectations for a modest increase as the stimulus cheques issued in March were largely spent the month prior. Forecasts had been for a +1% increase.

The Federal Reserve has continued to state that its interest rate policy will be determined primarily by inflationary and employment data. Sustainable inflation in the eyes of the Fed is 2-3% whilst unemployment which was 3.5% prior to the pandemic is currently at 6.1%.

In our view the risk of an earlier-than-expected rate rise from the Federal Reserve is increasing. This is based on better-than-expected data and, should this data be sustainable, would be needed to ensure the economy does not overheat.

We are not alone in this view. Future markets have now priced in an 80% chance or a rate hike from the Fed before the end of 2022.

The point to highlight here is that whilst the Federal Reserve remain committed to ensuring financial markets are recovering from the pandemic, there will be a time (perhaps sooner than forecast) where the rates will need to rise.

Longer term this is necessary but in the shorter term it has the potential to cause some increased volatility in equity markets.

Federal Budget

Locally, the Federal Budget was the major news release last week.

The government carried on from its previous budget (handed down a little over 6 months ago due to the pandemic) by spending up big, further promoting job growth and job creation.

Australia’s budget deficit will reach $161b this year which is more than $52b lower than what was predicted 6 months ago (namely due to the record high price of iron ore which is trading around $US205/tonne and which the government receives taxes from).

The deficit will then drop to $57b in 2024-25 with net debt to rise to $617.5b before peaking at $980b or 40.9% of GDP by 2024-25.

Businesses and aged care were undoubtedly the winners of Tuesday night’s budget with loss carrying-back provisions and full expensing of assets a big win for business whilst aged care received over $17b in funding in an attempt to clean up the industry following the failures identified by the Royal Commission.

Whilst return to budget surplus looks more than a decade away, the level of spending has been necessary, insulating and protecting the Australian economy from the negative impacts of the COVID-19 recession.

Nevertheless, with net debt forecast to peak at near $1tr in 2024-25, a roadmap setting out a distinct plan for how the government intends to reduce this extraordinarily high figure will be crucial to retaining our sovereign credit rating.    

NAB Monthly Business Survey

The outlook remains bright.

Business conditions reset last month’s record with trading, profitability and employment reaching new highs, whilst business confidence climbed higher implying conditions are likely to remain strong in the near term.

Business conditions rose +8 points in April and confidence rose +9 points driven by increases in mining and the services sectors. Outside of mining, finance, business and property are now all reporting strong conditions.

Forward orders increased suggesting that the pipeline of activity continues to build whilst capacity utilisation reached a new high in the month at 85.3%, driven by large increases in the services industries.

We have well and truly moved past the “rebound” phase of the recovery and are now seeing healthy growth in most of the economy. The services sectors are now showing strong signs of growth but disappointingly retail continues to show slightly softer confidence than other industries

ASX Weekly Wrap + commodities

The ASX was dragged down last week by the overall weakness in global equities.

Having been within 25 index points of reclaiming its pre-covid peak the ASX200 ending up falling -1% for the week.

Best performing sectors were consumer staples and healthcare which rallied +1% and +0.8% respectively whilst the risk-off nature of equity markets last week saw IT once again lead the declines falling -7% with the sector now having fallen -17% in May.

Iron ore closed the week flat at US$205/tonne despite having traded at nearly US$230/tonne intraweek whilst oil prices continued their recent charge higher rallying +0.5%.

Best performing stocks in the PRIME Australian Equity Growth SMA were heavyweights Commonwealth Bank (CBA) and Woolworths (WOW).

CBA shares traded +2.8% higher after releasing a Q3 update which showed its $2.4b cash profit was almost double its profit in the same corresponding time period from a year earlier.

The CBA results were underpinned by lower loan impairment expenses whilst income was +2% higher on the back of core volume growth and improved margins.

Additionally, CBA remains the best capitalised of the major banks with an exceptionally strong capital position and CET1 ratio of 12.7% which provides the possibility for management to consider various capital management initiatives in due course.

WOW shares were +3% higher after announcing it was proceeding with the demerger of its liquor and hotels division Endeavour Group.

The demerger if approved intends to unlock significant value for WOW shareholders with estimates the demerger could return as much as $2b to shareholders which would see Dan Murphy’s and BWS along with hotelier ALH Group form their own ASX-listed vehicle.

According to WOW, the board believes the demerger will enhance significant shareholder value and that both businesses post a potential demerger have strong future prosects and will benefit from great simplicity.

Should the demerge receive the necessary approval as we think it will, investors will receive one new share in Endeavour Group for each share held in WOW.

Looking ahead

Monday 17th May 2021 – Friday 21st May 2021

  • Monday: CN Unemployment Rate (APR), Retail Sales (APR), House Price Index (APR)
  • Tuesday: AU RBA Meeting Minutes, UK Unemployment Rate (MAR), US Building Permits (APR)
  • Wednesday: AU Westpac Consumer Confidence (MAY), Westpac Leading Index (APR), Q1 Wage Price Index, UK Inflation Rate (APR)
  • Thursday: AU Unemployment Rate (APR), US FOMC Minutes, Weekly Jobless Claims
  • Friday: AU Markit Services PMI (MAY) UK Consumer Confidence (MAY), Retail Sales (APR)

Friday 14th May, 5pm values

 IndexChange%
All Ordinaries 7239-86-1.2%
S&P / ASX 2007014-67-0.9%
Property Trust Index1458-23-1.6%
Utilities Index5942-155-2.5%
Financials Index6330-24-0.4%
Materials Index17237-273-1.6%

Friday 14th May, closing values

 IndexChange%
U.S. S&P 5004174-30-1.4%
London’s FTSE7044-85-1.2%
Japan’s Nikkei28084-1274-4.3%
Hang Seng28028-583-2.0%
China’s Shanghai3490+71+2.1%

Key dividends

Monday 17th May 2021 – Friday 21st May 2021

  • Monday: Div Ex-Date – Macquarie Group (MQG)
    Div Pay-Date – BOQPE (BOQPE), Qualitas Real Estate Income Fund (QRI)
  • Tuesday: Div Pay-Date – Betashares Legg Mason Western Asset Bond Fund (BNDS)  
  • Wednesday: N/A
  • Thursday: Div Ex-Date – Kathmandu Holdings Limited (KMD)
  • Friday: Div Pay-Date – Cromwell Property Group (CMW)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

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

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707 Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a consultation