Markets
Local and global equity markets were mixed this week with contrasting signals across economic data including falling US inflation, a UK rate rise, and weakness out of China.
More than 85% of the largest US companies have now reported first quarter results with earnings per share down 2.2% versus expectations of a 6.7% decline. 79% of these companies have beaten earnings expectations which is a strong result.
In local stock news, ANZ Bank’s net interest income increased by 20% to $8.5 billion from a year ago, driven by higher average net loans. Deposits and other borrowings increased by 8% to $843 billion. Earnings per share came in slightly higher than expected as did the dividend.
Westpac shares rose after the bank lifted its dividend by 15% and announced a first half net profit increase of 22% to $4 billion.
Commonwealth Bank shares rose following its quarterly result with the bank reporting a net profit increase of 1% to $2.6 billion but said that net interest income was 2% lower in the quarter.
Macquarie recorded a bumper $5.2 billion record profit result for the year helped mainly by its commodity business. No doubt investors will be questioning the sustainability of the hefty result. Earnings growth of 10% was well ahead of consensus whilst the outlook they provided was mixed.
Australian lithium miner Allkem agreed to merge with US rival Livent in an all-stock deal that will create at US$10.6 billion producer. The deal is being proposed as a merger of equals, likely to be completed by the end of the year, which will see Allkem shareholders own about 56% of the combined company with primary listing in New York.
NEXTDC entered a trading halt as the company announced plans to raise $618 million at an 8% discount to fund expansion in NZ and Malaysia and to increase their capacity in Sydney. The company expects construction to start next year.
Economic
The Federal Budget surprised with a $4.2 billion surplus, a significant improvement from the last estimate of a $36.9 billion deficit, with stronger than expected revenue from mining, corporate and income taxes. The government showed some fiscal restraint, but no plans to fix likely budget deficits in the years to come.
Australian new house lending rose by 4.9% in March, the first increase since January 2022, with lending to owner occupiers rising by 5.5% and to investors by 3.7%. Lending to first home buyers rose by 12.3%. The rise for the month was a big shock and may put further pressure on the RBA to maintain tighter monetary conditions.
Australian building approvals in the first quarter were the weakest in 11 years whilst business conditions fell in April.
Australian retail trade volumes fell by 0.6% in the March quarter. Outside of the covid period, this was the largest quarterly fall in volumes since the GFC. Cost of living pressures along with higher interest rates finally hitting home.
US consumer prices rose at a 4.9% annual pace in April, slowing slightly from March and coming in below expectations. The annual core figure, which excludes food and energy, rose 5.5% in April down from 5.6% in March.
US employers added 253,000 jobs in April which saw the unemployment rate fall to 3.4%. The April increase came in ahead of expectations for 180,000 jobs. Average hourly earnings rose by 0.5% in April to be up 4.4% on a year ago.
US consumer inflation expectations for the year ahead rose by 4.4% in April coming in below expectations and their last reading.
A key US loan officer survey showed the proportion of US banks tightening terms on commercial and industrial loans for medium and large businesses rose from 44.8% to 46% in the March quarter.
German industrial production fell more than expected in March which saw recession fears escalate in Europe’s largest economy. Production decreased by 3.4% on the previous month partly due to weak performance by the automotive sector.
The Bank of England hiked rates by 0.25% to 4.5% at its May meeting, bringing interest rates to their highest level since 2008. The lift was widely expected.
China service sector data showed activity grew for a fourth consecutive month in April, offsetting some of the negative sentiment from soft manufacturing activity data last week.
China export growth slowed for April with expectations that exports will decline further before bottoming out later this year. Imports unexpectedly fell in April from a year earlier.
China’s consumer inflation slowed to the weakest pace in two years in April while producer prices fall deeper into deflation. Stimulus likely to be required but authorities playing the waiting game for now.
Politics
US Treasury Secretary Janet Yellen said there are no good options for solving the debt ceiling stalemate and cautioned that resorting to the 14th Amendment would cause a constitutional crisis. There is a deal to be had, but President Biden is holding Congress hostage by not being amenable to any future budgetary cuts. US deficits are out of control and getting larger.
China said it would react strongly to any sanctions imposed on its companies by the European Union for supplying Russia with so-called “dual-use goods” (ie. goods that can be used for both military and civilian purposes).
Italy has signalled to the US that it intends to pull out from China’s Belt and Road Initiative before the end of the year. Whilst a final decision hasn’t been made, PM Meloni has indicated that her government is favouring an exit.
Weekly market updates are written by Chris Lioutas. Chris is on the board of Peer Wealth X Futuro Investment Committee. View LinkedIn
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