Weekly Market Update – 15 November 2021

US CPI rises to 30-year high

Much has been made about the transitory or persistent inflation debate.

Further confirmation on the persistent nature of inflation was delivered last week with US CPI rising 0.9% in October following September’s 0.4% rise. The data exceeded forecasts of a 0.6% rise and produced a headline annual inflation figure of 6.2% – the largest annual headline inflation figure in thirty years.

Core CPI (which strips out some of the more volatile inflation items) rose 4.6%.

So, where to from here?

We would strongly argue inflation has further to run, particularly when you consider that November and December 2020 inflation prints registered 0.2% increases, and both these are about to roll out of the annual inflation data in the coming months (and be replaced with higher readings of at least 0.4% and above).

On account of this and the fact that the Christmas season typically sees increased spending we are forecasting headline CPI to rise towards 7% by the end of December and core CPI to rise towards 5%.

The biggest problem here is the fundamental mispricing in the short end of the US yield curve that exists now and with core CPI at 5% or more, it will be virtually impossible for the Federal Reserve to argue inflation is transitory.

As a result, markets should be increasingly pricing in the likelihood that US interest rates rise by June/July 2022 and continue to raise thereafter until we see some moderation.

Because the Fed continues to argue its transitory point and maintain its dovish policy outlook, yields in the US continue to misprice themselves. 1-year bond yields are at 0.17% despite Fed futures indicating two rate hikes and 0.5% yield by end of 2022.

The 2-year yield is currently 0.51%, and yet Fed futures imply by end of 2023 the Fed could hike 4 or more times. So, 1-year yields need to be above 0.5% and 2-year yields need to be above 1%.

In terms of market reactions to the inflation data, the S&P500 retreated with tech stocks faring worst and the USD climbed to a new high (AUD/USD trading sub 73c) on the back of inflation concerns prompting the Fed to turn more hawkish.

The only beneficiary was gold with spot prices rallying due to real bond yields falling to new lows. While gold is not a perfect inflation hedge, it is a good hedge against real interest rates (which are inflation adjusted) falling or moving more negative.

The MSCI World Index rose +1% in AUD terms.

Unemployment

Australia’s labour force struggle to find the uptick many were expecting in October with Victoria emerging from its latest lockdown.

October’s job numbers fell by 46,000 polarising analyst estimates of job gains to the tune of 50,000. Perhaps the basis behind these forecasts was as simple as thinking lockdowns were done and people would be re-employed?

We believe next month’s November data will likely show the healthy rebound analysts were expecting for October so the 5.2% unemployment rate spike may be somewhat short-lived.

The major positive to emerge from the employment figures was the +0.2% increase in the labour force participation rate which had declined each month from July through September.

This suggests some sort of positive re-engagement with the workforce by people who had previously become disillusioned and despondent.

It is also worth mentioning that the 4.6% unemployment rate recorded in September was largely scoffed at. The declining participation rate had massaged the wider employment statistics to appear better on the surface than what they really were.

Most had assumed unemployment was somewhere in the vicinity of 5%-5.5% in reality so October’s statistics were largely accurate.

Employment data is now certainly on the rebound and we think this should normalise by March or April 2022.

NAB Monthly Business Survey

Business conditions and confidence rose in October with NAB’s monthly business survey showing confidence was returning to near decade highs seen in Q2 2021.

Business confidence was stronger driven by Victoria as businesses anticipated reopening. Retail, business, finance & property, and personal & recreation services all saw large confidence improvements whilst capacity utilisation rebounded to 81.5% and forward orders rose strongly –both now back above average.

Conditions likewise jumped but will rise more slowly until activity increases meaningfully. The Australian macro recovery story is very much ‘in play’ which should imply further rises in bond yields and possibly a strengthening of the AUD.

Importantly, we believe there is scope for the ASX to outperform other markets on a short-term basis, having meaningfully underperformed in the past 3 months.

Thoughts following FY21 Bank reporting season

Results season highlighted just how different the outlook for the next 12 months will be compared to the last. As a result of COVID and the impact this has had on inflation (particularly in the last quarter) we expect central banks will act quicker than they had originally guided to.

This ‘pivot’ and ultimate hiking of interest rates will have a key impact on banks profitability and margins, so we remain comfortable with the outlook for banks in the medium term. However, central bank policy won’t shift overnight and given strong competition in the mortgage space continues to weigh on net interest margins (NIMs) we expect in the shorter-term (FY22) core earnings will largely be flat.

A larger rebound in FY23 as headwinds abate and higher rates start to flow through to bank profitability will have a positive impact to earnings.

The biggest takeaway from reporting season was just how saturated and competitive the mortgage market had become given cheap finance.

Competition in this space was a material drag on NIMs in 2H21 ranging from 4bps at ANZ to 11bps at WBC.

Strong price competition was exacerbated by a growing shift to fixed rate loans, which have grown to ~40% of flow from a historical average of ~18%. We expect a sharp fall in the take-up of fixed rate products in FY22 as higher swap rates are driving asset pricing higher, reducing their attractiveness vs variable.

Recovery of global plasma donations

CSL is the highest conviction position in the PRIME Australian Equity Growth SMA. However, the impact of the pandemic on plasma donations has seen significant and as such CSL has underperformed the ASX200 by ~17% in the past 12 months.

Since the onset of the pandemic plasma collection volumes in the USA have fallen ~20%, however, we believe we have now cycled through this trough and expect plasma collection to return to their pre-pandemic levels by Q421.

This should result in more normal industry earnings by Q3 2022 with immunoglobulin demand likely to grow at 10% pa until 2024.

If collections return to pre pandemic levels, this will result in 2024 EPS upside of +23% for CSL which we think is favourable.

One of the other fundamental reasons behind our conviction in CSL is its defensive qualities. The portfolio has long been overweight healthcare which we believe can outperform should markets consolidate in the medium term.

ASX Weekly Wrap

The ASX200 fell -0.2% week with mid-caps outperforming (+0.6%) whilst large caps (-0.2%) and small caps (-0.2%) dragged on overall returns.

Miners were the only sector to deliver positive returns last week rising +4.7% with the major players Fortescue (+10.4%), BHP (+4.5%) and RIO (+3.8%) all rallying strongly.

Healthcare was the weakest part of the market giving up most of the prior week’s gains falling -3.4%. Sonic Healthcare, Ramsay Healthcare and Cochlear were the major laggards all falling between 6-7%.

Looking ahead

Monday 15th November 2021 – Friday 19th November 2021

  • Monday: CN Unemployment rate (OCT), Retail Sales (OCT)
  • Tuesday: AU RBA Meeting Minutes, UK Unemployment Rate (SEP),
    US Retail Sales (OCT)
  • Wednesday: AU Westpac Leading Index (OCT), Wage Price Index
    (OCT), UK Inflation Rate (OCT), US Building Permits (OCT)
  • Thursday: US Weekly Jobless Claims
  • Friday: UK Retail Sales (OCT)

Friday 12th November, 5pm values

 IndexChange%
All Ordinaries 7766-11-0.1%
S&P / ASX 200 7443-14-0.2%
Property Trust Index 1656-30-1.8%
Utilities Index 6178-43-0.7%
Financials Index6815-38-0.6%
Materials Index15561+700+4.7%

Friday 12th November, closing values

 IndexChange%
U.S. S&P 5004683-15-0.3%
London’s FTSE7348+44+0.6%
Japan’s Nikkei29610-2-0.0%
Hang Seng25328+457+1.8%
China’s Shanghai3539+47+1.3%

Key dividends

Monday 15th November 2021 – Friday 19th November 2021

  • Monday: Div Ex-Date – Plato Income Maximiser (PL8) Div Pay Date –
    BOQPE (BOQPE), Charter Hall Long Wale REIT (CLW), Qualitas Real
    Estate Income fund (QRI), Waypoint REIT (WPR)
  • Tuesday: Div Pay Date – Betashares Legg Mason Australian Bond Fund (BNDS)
  • Wednesday: Div Ex-Date – N/A
  • Thursday: Div Pay Date – Aventus Group (AVN), Bank of Queensland (BOQ)
  • Friday: Div Ex-Date – MBLPD (MBLPD), Soul Pattinson (SOL)

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 4707Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729Gina McIntoshT: (07) 3557 2557

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.

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