Martin North – Page 20 – Digital Finance Analytics (DFA) Blog

Corporates Gouge, While IMF Warns The Inflation Squeeze Will Be On For Longer Than Expected!

Households will see Inflation around for much longer than expected and while the pressure on households continue to build, so does distrust across the economy in Australia, according to data from the IMF and a special Roy Morgan End of Financial Year webinar.

Despite the better-than-expected US inflation figures, the International Monetary Fund in its quarterly update of the World Economic Outlook just warned that momentum on global disinflation had slowed, largely due to ongoing elevated rates of services inflation.

For example, the latest data today for the UK showed that The Consumer Prices Index inflation unexpectedly stays at 2% in June, higher than economists predicted and causing a paring of bets on when the Bank of England will cut rates at its next meeting. The news sent the pound above $1.30 for the first time in a year. Services inflation that has been a special focus of the BOE was also unchanged at 5.7%. Economists had expected the headline rate to drop to 1.9%, while the central bank had forecast services at 5.1% by now. Traders pushed back bets on a rate cut next month, pricing in a roughly 30% chance of a move on Aug. 1, down from almost 50% yesterday.

In Australia, the June quarter consumer price index on July 31 will be decisive in determining whether the Reserve Bank of Australia will be forced to deliver a 14th interest rate rise at its August 6 board meeting. With underlying inflation running about 4 per cent, markets are pricing in a 16 per cent chance the RBA will raise the cash rate to 4.6 per cent, from 4.35 per cent, when it next meets. That said, bets on another rate rise from the RBA eased over the past week as bond markets rallied on the back of an outright decline in the US consumer price index, though I think the read across from the US by the markets is over done.

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Markets Reach For The Stars, Even As A Nascent Turn Is Under Way!

This is our weekly market update, starting in the US, then Europe, Asia and Australia and covering commodities and crypto.

This week, hopes of US interest rate cuts before the end of the year rose after data this week showed that inflation was cooling faster than expected, has muddied the waters, though all three US benchmarks powered higher, despite results from three major banks, which disappointed for different reasons. MSCI’s gauge of stocks across the globe rose 0.78, hitting another record intraday high.

The S&P 500 and Dow surged to all-time highs before giving up much of those gains by the close. So far this year, the Dow has risen 6.4%, underperforming the broader S&P 500 and the tech-heavy Nasdaq Composite, which have advanced 18.2% and 23.1%, respectively, over the same period. The S&P 500 was recently trading at 21.4 times forward earnings, compared to a historical average of 15.7, so its probably way over-valued!

Banks got hit at the start of the US earnings season after reports from JPMorgan, Citigroup and Wells Fargo. Wells Fargo slumped 6 per cent after warning it won’t be able to whittle away costs as fast as forecast, after the lender missed estimates for quarterly interest income. JPMorgan missed on a few key metrics like net interest income — despite posting record profit from by rising investment banking fees. However, shares of the world’s largest bank dipped 1.2%. Citigroup said costs for the year are likely to be at the high end of the range previously provided and fell 1.8% despite reporting a surge in investment banking revenue.

In Australia, the flagship S&P/ASX 200 Index gained 0.9 per cent, to a record 7959.3 points, to finish the week up 1.2 per cent. In the final session of the week, the market was helped higher by Australia’s largest bank, CBA which added 1.3 per cent to $131.66, extending a bull run that has sent shares up more than 30 per cent in 12 months. As CBA ended the day with a $220.3 billion market cap, it surpassing BHP’s $220.1 billion capitalisation. The latter finished the day 0.37 per cent lower at $43.40 after informing the market late on Thursday that it would suspend nickel mining operations in Western Australia. Friday marked the first time that CBA has overtaken BHP as Australia’s most valuable public company since November 2021.

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US Markets Swing Towards Rate Cuts As Inflation Eases…

Here we go again, as inflation, which had been falling last year, but rising in the first part of 2024, now appears to be easing again, so markets who at the start of the year saw 6 rate cuts, then trimmed them to none, and possibly a rise, are now again betting on multiple cuts later this year. Talk about fickle.

Actually, US inflation did cool broadly in June to the slowest pace since 2021 thanks to a long-awaited slowdown in housing costs as the so-called core consumer price index — which excludes food and energy costs — climbed just 0.1% from May, the smallest advance in three years the Bureau of Labor Statistics reported. Core CPI climbed 3.3% over the last 12 months after rising 3.4% in May.

Its too soon to bank big rate cuts in the US, as the data remains mixed, but the market is like a set of lemmings swinging one way and the next, in trying to out guess the FED. But certainly, it’s more likely now that the FED will cut well before the RBA where inflation is still on the up.

The RBA needs to tackle seemingly much higher and more intractable inflation while maintaining a far less restrictive policy given its 4.35 per cent cash rate, a rate lower than many peers. This is a policy error which will inflict lasing damage on the local economy.

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Our Economic Update For July!

This is my quick economic summary for July, where I look over the recent data highlight some of the key questions ahead.

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