Good morning, its Monday 21st November and I’m Brendan from Milford Asset Management.
Global markets traded in a choppy fashion last week, as investors continued to try and make sense of recent data releases.
Earlier in the week, the US producer price index re-affirmed some of the signals produced by the consumer price index data the week before. Producer price growth stepped down in October more than the market expected, with final demand advancing 8% from a year earlier, lower than expectations of 8.3%. This data -reemphasized that inflationary pressures are beginning to ease, which was taken well by the market.
Later in the week we got a read on the state of the consumer via the retail sales report, which surprised to the upside. The month on month print for October advanced 1.3%, ahead of expectations of 1%, and driven largely by motor vehicle sales. Excluding autos and gas, retail spending increased 0.9% vs expectations of 0.2%, outlining strong consumer appetite for other categories.
Despite this strength in consumer spending, there are signs that this will fade in coming months. The New York fed household debt and credit report outlined that total US credit card debt accelerated at the fastest pace in more than 20 years, increasing $38bn in the 3rd quarter to $930bn, just shy of the all time high. Heightened interest rate risk and a low household savings rate of 3.5% exacerbates the surge in credit card debt, hence there is mounting data to suggest that consumer spending should slow going forward.
The aforementioned data clearly has something in it for both bulls and bears; for the bulls, slowing inflation and resilient consumer spending could mean a soft landing by the fed is still possible. For the bears, the strength of the consumer could suggest a greater need for more restrictive policy from the federal reserve going forward.
In the UK, inflationary pressures are still very evident. CPI increased to 11.1% y/y vs expectations of 10.7%, up from 10.1% in September. Unsurprisingly, the vast majority of the surge was attributed to an 88.9% increase in electricity and natural gas prices. We also heard from chancellor Hunt, who announced a total package worth 55bn pounds split between 25b in tax raising measures and 30b in spending cuts. As part of the package, Chancellor Hunt noted that the Energy Price Guarantee would be increased to 3,000 pounds from April 2023.
In Australia, we had the October employment report. Full time employment change was strong, with 47k jobs added vs 13k in September. The unemployment rate fell to 3.4% vs 3.5% expected, with participation contracting slightly to 66.5%. This strong jobs print, coupled with the 3.1% increase in wage growth, increases the risk that the RBA have to do more to sufficiently tighten financial conditions.
In equity news:
M&A activity continued in Australia, with Pendal and Perpetural agreeing to revise the cash and scrip consideration mix under the scheme of arrangement. This comes on the back of news that courts are pressuring perpetual to complete the acquisition of Pendal, despite perpetual currently under potential takeover by BPEA private equity and Regal. Pendal shares increased 10.5% on the back of this, while perpetual shares slumped 12.6% given the court ruling likely makes their own takeover by BPEA and Regal less likely.
BHP reached a $9.6b dollar deal to buy copper and nickel producer oz minerals, in a push to gain supplies of metals to accelerate their clean energy pursuit. The deal values oz minerals at $28.25 a share, representing a 49% premium to pre-offer price.
Aristocrat Leisure reported FY22 results last week, with net profit of 1.1bn broadly inline with consensus. The Americas division was stronger, while ANZ and other international gaming was weaker than expected. Outlook commentary was disappointing the market, given it was largely qualitative and seemed to imply slower growth than history. Market expectations for profit growth next year were around the mid-teens, hence some of this was pared back and the shares ended the day down over 5%.
New Zealand retirement operator Ryman Healthcare reported first half results last week, outlining underlying profit of $139m, up 45% on the prior period, driven by strong margin gains. The result outlined a slower first half build rate, building 187 units while targeting a full year build rate of 1000. The key disappointment to the market was the large increase in net debt from 2.6bn to 3bn, lifting gearing to 45%.
In the week ahead, a key focus will be the RBNZ on Wednesday, where the market is pricing a fairly even chance of 50 or 75 basis point interest rate hike. The RBNZ are grappling with recent inflation data that was stronger than forecast, and record low unemployment, while also having to consider the lagged effects of monetary policy and the implications of higher interest rates on the broader New Zealand economy.
Elsewhere, global data is lighter for the week, so attention will be on reporting season which continues in New Zealand and Australia.
Thanks for listening, we will see you again next week.
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