Global
Bond yields and commodity prices retreated in July, as worries over global recession began to take hold. Ironically, this led to a rally in growth assets as the market cheered lower interest rates and energy prices. Central Banks remain hawkish and intent on increasing short term interest rates, but the market is starting to believe that peak inflation maybe close. Indeed, US headline inflation fell in July, from 9.1% to 8.5%, while core inflation remains steady at 5.9%.
That said, there is still a long way to go for US inflation to fall back to target (2%) and the US cash rate is expected to steadily climb from 2.5% to 3.5% by early 2023. The US yield curve is now inverse, in that short term interest rates are higher than long term interest rates, which historically indicates recession ahead. Indeed, the US has already had two consecutive quarters of negative growth, but a recession has not been declared because employment remains strong.
Europe is facing headwinds in terms of drought conditions in the short term and a likely gas shortage over the coming winter (related to the Russian/Ukraine war). There is some hope that China may emerge from its COVID lockdowns in the second half of 2022 but developments in its property sector continue to remain a concern.
Australia
The Australian economy remains robust on strong commodity prices and a recovery in consumer spending and business investment, post COVID social restrictions. A ‘La Nina’ weather pattern parked over the mainland has benefited agricultural sectors but has hit QLD and NSW with regular flooding.
The new Labor government has been busy acting on climate change and foreign relations, although US provocations in Taiwan have kept Australia/China relations on edge, despite early hopes of a thawing in the frosty relationship. Australian iron ore and coal remain in demand, but prices are starting to ease as China slows.
The labour market remains tight with the unemployment rate at 3.5%, the lowest in 50 years. The Australian inflation rate increased to 6.1% in the June quarter and is expected to peak around 7.8% in the second half of 2022. The Reserve Bank of Australia (RBA) continues to increase the cash rate to slow demand in an effort to reduce prices.
In July, consumer confidence dived on rising costs and interest rates and falling house prices. A key source of uncertainty is the pattern of consumer spending from here. Business confidence usually follows consumer patterns.
Outlook
There is some hope that inflation pressures will ease from here. However, there is still a long way to go for inflation to retreat to target. Central Banks are likely to keep increasing interest rates for the remainder of 2022. The full impact of rising costs and interest rates on household budgets are not likely to be felt until late 2022/early 2023. For this reason, we remain cautious. For us it seems too early to cheer the end of inflation and the tightening cycle.
The positives are that investors are now being rewarded with higher interest rates on cash, term deposits and bonds. Growth assets have rallied in July and into August, but we remain cautious on the sustainability of this rally. If consumption slows, then surely companies face tougher conditions ahead.
After a 13-year bull run from March 2009 to January 2022, we think it is logical to expect at least a 2-year bear run, where growth assets struggle to make gains. This is not as bad as it sounds, as investors get much better value, particularly amongst listed assets, for those taking a long-term view.
The next key events on the calendar include:
Australian FY22 reporting season – August 2022
RBA meeting – 6 September 2022
Fed meeting – 20/21 September 2022
G20 meeting in Bali – 15 November 2022
Bill Keenan
Principal, Portfolio Manager
Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.
Bill has 28 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.
Warnings
General Securities Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.
Past performance is not a reliable indicator of future performance.
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