Martin North – Page 15 – Digital Finance Analytics (DFA) Blog

Markets Higher As They Hang On For Rate Cuts (Again), While Voters Vote Against Incumbency.

This is our weekly market update, where we start in the US, cross to Europe and Asia, and end in Australia, while covering the main points in commodities and crypto along the way.

This past week has been a doozy, with US markets still clawing higher on increased rate cut expectations, as the latest employment data and adjustments posed some important questions alongside a weakening the dollar, while in the UK the incoming Labour Government won with a whopping seat majority despite voters really voting against the Tories rather than for Starmer.

In France, horse trading ahead of Sundays second pole could mean the Right do not get the prize they were expecting, while Oil was firmer across the week on fears of middle east conflicts and in Crypto, Bitcoin has dropped more than 20% from recent highs.

Wall Street stock indexes closed firmer on Friday, with the tech-heavy Nasdaq and benchmark S&P 500 hitting record highs.

All up, the Dow Jones Industrial Average rose 0.17%, to close at 39,375.87. The S&P 500 gained 0.54%, at 5,567.19 and the Nasdaq Composite advanced 0.90%, to 18,352.76. For the week, the S&P 500 gained 1.95%, the Nasdaq rose 3.5% pct, and the Dow climbed 0.66%. The Russell 2000 Small Cap index is down 0.95% for the week and the S&P500 equal weight was parallel to its 2022 high, showing the narrowness of the support for the all time highs on the S&P500.

French financial markets have come under selling pressure since President Emmanuel Macron called for a snap election last month, with concerns that a far-right win could add to worries over fiscal sustainability. But there is also nervousness about what will happen if there is no clear winner in Sunday’s second round of voting. Fresh polls showed the far-right National Rally (RN) party and its allies were still in the lead but looked to fall short of getting an outright majority.

The UK national election on Thursday propelled the Labour Party to a sweeping victory, and Labour leader Keir Starmer became the next Prime Minister. In the six-week election campaign,

The latest update indicates that Labour has won 411 seats, and the Conservatives have secured 121 seats. This gives Labour a massive majority in the House of Commons. One seat has not yet declared a winner.

Actually, though this was a vote against the Tories, while the share of the vote Labour got hardly moved, and was in fact lower than in recent elections, votes went to the right in the form of Reform, or to the Liberal Democrats, Greens and other parties – and Labour was unseated in a couple of spots as a result of this, and in the light of their stance on Gaza.

As Sky put it, A thumping majority without a thumping share of the vote’. Chief Pole analyst John Curtice said “Actually, but for the rise of the Labour Party in Scotland… we would be reporting that basically Labours vote has not changed from what it was in 2019”. Roughly one third of the votes and two thirds of seats shows the problem with the first past the post system, with turnout (which is not compulsory) below 60%. Labour is pretty centralist and conservative.

Starmer did not win because Britain was hankering for a social-democratic government. He did not win because his Albanese-style small-target strategy appealed to voters. He won merely because he wasn’t the government. Starmer won because Labour was not the Tories. Prime Minister Rishi Sunak’s government was stale, tired, divided, regicidal and largely directionless, sapped by eight years of post-Brexit chaos.

Burnout: Households Shut Their Wallets As Living Costs Rise!

Trying to get a handle on what is going on in the economy is not easy, as I discussed recently in my show about retail turnover, which when adjusted for inflation is falling, and falling hard.

So no great surprise to see that the latest data from the ABS on Household spending growth showed it has slowed, up 0.1% over the year. The 0.1 per cent rise in May follows a 2.2 per cent increase in the 12 months to April.

Through the year household spending increased for four spending categories. The largest increases were in: health (+8.8%), miscellaneous goods and services (+7.3%) and furnishing and household equipment (+3.3%).

Through the year, household spending on: services rose 2.3%, driven by increased spending on health and other services. goods fell 2.5%, driven by decreased spending on clothing and footwear and goods for recreation and culture.

Once again, there was higher growth in spending on non-discretionary goods and services, – things people have to buy such as on health services and food, compared to discretionary items – things which are not necessary, rather more aspirational spending. Typically when people are under financial pressure, it shows first in a fall in non-discretionary items.

But this is not inflation adjusted, at 4% currently and if you adjust for inflation, in fact both are falling. Plus we have a population increase of circa 600,000 which should help the numbers. So this weak data might be seen as one indicator which suggests a further RBA rate hike is not needed, as the tightening is now showing, though of course the various tax cuts and other Government support flowing from 1 July 2024 worth at least $20 billion could well boost household spending.

At very least it does appear the Government and RBA are pulling in different directions – in what Tarric Brooker has coined as “burnout economics”- I love the smell of burnout in the morning!

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Kiwi Home Prices Continue To Drift Lower…

Data from CoreLogic shows the “dead cat bounce” in New Zealand home prices, driven by the higher for longer interest rates, and significant pressure to refinance,

Recent changes from 1st July will not have much impact on the market, while the Reserve Bank won’t be cutting rates for some time. Demand will remain weak, as migration starts to turn negative.

Therefore expect more downside to prices, especially in areas of Auckland and Wellington!

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Oil Up, And Bitcoin Down On Independence Day!

The US markets are closed Thursday, on July 4th, but there were a couple of significant developments across Oil and Bitcoin nevertheless this week.

Firstly, Bitcoin The world’s biggest cryptocurrency took little support from weakness in the dollar, which fell amid increased bets on interest rate cuts by the Federal Reserve, as the Bitcoin price fell sharply to a two-month low on Thursday, breaking past a key support level thanks to uncertainty over several points of selling pressure, chiefly defunct exchange Mt Gox, saw traders remain averse towards the token. Broader crypto prices also followed Bitcoin lower.

Elsewhere, Oil prices fell from two-month highs in Asian trade on Thursday, as traders collected some profits from a strong run-up this week, while soft U.S. economic data raised some concerns over long-term demand.

But prices were still relatively buoyant after a substantially bigger-than-expected drawdown in U.S. inventories, while persistent conflict in the Middle East also kept a risk premium in play.

While the volatility in Bitcoin might be considered a side-show, the recent moves higher in Oil are more significant, and if held, will translate into higher prices and inflation down the road. The current geo-political uncertainties and electoral uncertainties are haunting markets, even though the NASDAQ hit another high. Something will need to give, eventually.

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More Signals For An OZ Rate Hike Incoming?

The New Deputy Governor at the RBA said last week, that when it comes to a rate decision, they look at many different measures, apart from the recently released monthly series which showed a lift to 4% last time around in May.
So now, in May, so before any tax cuts or other Government help has hit, Australian retail sales rose by more than expected with spending largely driven by discounts in the face of elevated borrowing costs, an outcome that further strengthens the case for an interest rate hike this year.

As a result, yields on policy-sensitive two-year bonds rose to 4.289% as rates traders boosted the odds for an interest rate hike this year. Stocks pared gains, with the ASX 200 closing still in the green, at 7,739.90.

Australian retail turnover rose 0.6 per cent in May 2024, according to seasonally adjusted figures released today by the Australian Bureau of Statistics (ABS), making it the biggest increase in four months, The outcome, which was double the pace that analysts forecast, follows a 0.1% gain in April and a 0.4 per cent fall in March 2024.

We should highlight that with population growth of around 600,000 in the past year, and inflation running circa 4%, we should absolutely be expecting to see retail turnover lifting, as people pay more the things they buy, and more people buy them.

All up, to me while there is a better tone to this numbers, many consumers remain under intense pressure, while strong population growth is working its “magic” in cushioning retailers from the worst impacts and are allowing them to retain and build margin. Other data suggests more vehicle sales slowed into the financial year end. The tax cuts might well given a further boost to sales, but potentially also to inflation.

The ASX Rate tracker is now seeing a high of 4.47% in November, and back to 4.35% in June next year. The bottom line is I think markets are correct in reading this as a reinforcing sign that rates may need to go higher to snuff out inflation. But is not definitive, yet as there is more data water to go under the bridge.

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DFA Live Q&A HD Replay: Investing Now: With Damien Klassen

This is an edited version of a live discussion with Head of Investments for Walk The World Funds and Nucleus Wealth, Damien Klassen. As we start the new financial year, how are the markets looking and what are they key trends ahead?

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From Here, Where? As Uncertainty Haunts The Markets!

This is our weekly market update, where we start in the US, cross to Europe and Asia, and end in Australia, and we also cover commodities and crypto, as I get my ideas straight for the next leg of the year. In essence, AI has driven markets hard, especially in the US, but market breadth is narrow, and risks remain elevated.

Shares in New York ended lower on Friday, reversing modest opening gains after the latest inflation data showed that the disinflation narrative was intact, widening ever so slightly the door to a pivot to rate cuts. So an early rally fizzled as investors digested in-line inflation data and weighed political uncertainty after the U.S. presidential debate where the shaky performance from U.S. President Joe against Donald Trump has just ratcheted November’s U.S. election uncertainty up substantially.

Data showed U.S. monthly inflation was unchanged in May, an encouraging development after strong price increases earlier this year raised doubts over the effectiveness of the Fed’s monetary policy. The Commerce Department report also showed consumer spending rose marginally last month, fueling optimism that the U.S. central bank could engineer a much-desired “soft landing” for the economy.

There was a late wave of selling the magnificent seven, with a 3 per cent tumble in Meta. Amazon, Alphabet, Apple and Microsoft each closed more than 1 per cent lower though Tesla edged 0.2 per cent higher.

Wells Fargo noted that upcoming events, such as the November elections and potential delays in disinflation, may cause episodes of market volatility in the months ahead. Worth reflecting again on the fact that thirty percent of the S&P’s returns this year have come from Nvidia alone. It was now the most expensive stock on the most expensive market in the world and the Magnificent 7 accounts for 71% of the S&P 500 Index’s year-to-date return. Tightrope time?

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