Market Insights and Education & Resources

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Here are the main factors driving the ASX this week according to portfolio manager Jim Taylor. Reported by portfolio specialist Chris Adams

THE market was positioned for good news on the US inflation front – and took a hit when the CPI came in slightly stronger than expected.

A strong inflationary pulse across a broad range of categories ran contrary to a prevailing narrative of softer inflation.

In an environment where the Fed is driven by data – rather than by its own forecasts – sentiment on the monetary policy path shifted quickly.

The Fed funds rate is now expected to reach 4.2% in December 2022, up from 3.9%.

Equity markets took a hit. The NASDAQ fell 5.54% on the day of the data print – its worst fall since March 2020. The S&P 500 was off 4.3%, its worst since June 2020.

Poor sentiment was compounded by pre-released earnings from Fedex, which saw quarterly EPS at $3.44 versus $5.15 consensus expectations and an even bigger shortfall on next-quarter guidance.

Management cited softer demand, weakening further into the quarter’s end, both in the US and internationally. This exacerbated concerns around the economic backdrop.

The S&P 500 fell 4.7% for the week. The S&P/ASX 300 was down 2.2%.

US inflation

Headline CPI rose 0.1% month-on-month in August, against an expected decline of 0.1%. On an annualised basis inflation is running at 8.3% versus 8.5% last month – again higher than the expected 8.1%.

Core CPI rose 0.3% to 0.6%, higher than 0.35% forecast. Annualised, it is running at 6.3% m/m, versus 6.1% expected – the highest print since March.

The key concern was the breadth of disappointing numbers across multiple buckets including shelter (34% component), new and used cars (8%), medical services (7%), food away from home (5%), apparel (2%), utility gas service (1%) and motor vehicle repair (1%).

Inflation is no longer driven by energy and food.

Housing inflation is a slow-moving part of the US CPI data. Landlord rent expectations have fallen recently but will take a while to flow through into the data.

The next biggest segment is new and used car prices. These have definitely turned down, which is helpful.

Wage pressure in healthcare is a global phenomenon and is likely to continue ticking up as wage demands are met.

More positively, airline fares fell by 4.6% in August – less than expected. This should continue to fall as airfares follow jet fuel prices quite closely, and they have reversed most of the spike triggered by the war in Ukraine.

Food inflation is finally moderating. The 0.7% increase in food-at-home prices was the smallest since December, after seven straight 1%-plus increases.

Lower global food commodity prices are starting to work through, with more to come.

Petrol pump prices are down to $3.69/gallon – 26% below an all-time high in June and the lowest level in six months.

The “peak inflation” narrative is probably still intact, but the core components remain stubbornly sticky.

Producer Price Index data (see below) suggests some relief is on the way. But it won’t matter this week.

Fed officials have made it very clear they will not slow the pace of rate hikes until they see convincing evidence that core inflation pressure is easing on a sequential basis.

The chance of a 50bp hike this week has gone.

The market has wavered between a 20%-30% chance of a 100bp hike.

The chance of a soft economic landing has fallen for two key reasons:

  1. Strength and stickiness in both goods and services inflation indicate meaningful reductions toward 2% are impossible without a recession and a big fall in employment
  2. The risk of a Fed overshoot has increased, meaning a recession gets induced almost regardless of what the data does from here.
US PPI

The Producer Price Index data was more reassuring than the CPI print.

Headline PPI fell 0.1%, in line with consensus, helped by falling energy prices. Annualised, it is 8.7%. This is down from 9.8% in July and 11.2% in June.

The key message here is that Core PPI inflation is now falling across both goods and services.

Core goods rose at a 6.1% annualised rate in the three months to August, exactly half the peak pace in the three months to May.

Core services rose 3.9% in the three months to August. This was an even bigger slowing from the 10.8% peak in the three months to March.

Consumer inflation expectations have plunged for both the three and five-year time horizons.

Other US data

The Atlanta Fed Wage Tracker grew to 6.7%.

Companies that have high turnover of low-paid workers are feeling the full force of wage pressures in the economy. Wage growth for job switchers far exceeds that for people staying with their current employer. 

Retail sales were slightly disappointing with core sales down 0.3% versus flat expectations. 

But they haven’t fallen off a cliff and may reflect higher petrol prices over the past few months, which have now reversed.

Australia

GDP data in the second quarter showed continued strength in consumer spending, driven by a rebound in services. This included a quarter-on-quarter rise of about 30 per cent in tourism-related spending.

It seems likely that the consumer hangs in there for another few months, before feeling the pinch in the December quarter as increased mortgage rates flow through to household cash flows.

Employment increased 33,000 in August. This was in line with consensus but only partially reversed the prior month's 41,000 decline.

At the same time, labour participation moved back close to its record highs (66.6%) and unemployment ticked up to 3.5% (consensus expected 3.4%).

Hours worked also recovered most of the prior month's losses (0.8%) and the under-employment rate fell to 5.9%.

It’s notable that the number of workers affected by sickness remains nearly double its usual amount (about 750,000).

The data hasn’t moved expectations for another 100bps of tightening across Q4, taking rates to about 3.35%.

Europe

The EU has proposed a redistribution of excess profits from energy companies and non-gas-power generators (nuclear and renewables), totalling an estimated EUR 140 billion.

This would involve a price cap of 180 euros per megawatt hour, which would raise about EUR120 billion.

The balance would come from energy companies contributing a third of any profit more than 20% over the last three-year average.

The plan is complex and will take time to put into practice. Each member state would have jurisdiction over key aspects.

The plan includes a binding agreement to get winter peak electricity use down by 5% – and overall 10%.

Markets

Australia held up better than other markets last week due to index composition.

Large caps did better than small caps. Small resources and REITs bore the brunt of the sell-off. Interestingly, consumer staples did not prove to be defensive in the weak market and we saw a clean sweep of negative returns across all sectors.


About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

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US rates are heading for 4% after inflation remained high in August. But the RBA may have more patience. Pendal's TIM HEXT explains why

ALONG with many other observers, we expected US inflation to moderate more than it did in August.

Headline CPI came in overnight at 0.1% (8.3% annual) and underlying at 0.6% (6.3% annual).

A new group of unrelated components (including vehicle repair, dental charges and tobacco) showed fresh signs of inflation, pushing the rate positive for the month.

We still expect goods deflation in the months ahead. Oil prices and most other commodities are weak.

But US wage growth is spreading inflation wider into services. Services inflation is now the battleground and labour supply lines are normalising far slower than goods.

What little patience the US Federal Reserve may have had is running out.

Fed funds now seem destined for 4% or higher. As little as six weeks ago the market was expecting terminal rates closer to 3%.

RBA may be more patient

As always, Australian bonds will follow the US. But the RBA seems prepared to show a bit more patience.

This is due to a number of factors — but the two main ones are wages and our floating rate mortgage market.

The NAB business survey showed that rate hikes are yet to have any impact.

This is not surprising as the economy is now almost fully open, many have pent-up savings to spend and fixed rates are protecting 40 per cent of mortgage holders.

The RBA remain on course for 3% cash rates by year end (either 2.85% or 3.1%).

It will likely rely on the fixed rate mortgage cliff and immigration to do the heavy lifting to combat inflation in 2023.

Bond markets are caught in the loop of pushing rates up with the Fed but also with one eye on increasing recession risks.

Flatter curves seems to be the favoured way of reconciling these two outcomes.

Credit and equity markets were hit by the high inflation numbers, but for now look to be range-trading rather than breaking down.

The only certainty for now is volatility is here for a while yet.

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Energy security and workplace relations were the big ESG themes in this year’s ASX reporting season, says Pendal’s RAJINDER SINGH

ENERGY security and workplace relations were among the big ESG themes to emerge from this year’s annual reporting season, says Pendal’s Rajinder Singh.

The volatility of energy supply amid disruption in energy markets has become abundantly clear in the last six months, leaving companies with real challenges on how to respond, says Singh, who manages sustainable Australian share funds for Pendal.

And the emerging theme of labour shortages and industrial action by workers is starting to show up as a key risk for Australian companies.

“This reporting season was quite interesting because we have this ongoing bounce-back out of Covid, while at the same time there are top-down geopolitical issues and the bogeyman of inflation and interest rates,” says Singh.

“And we’re seeing ESG perspectives play out as well.

"A lot of companies have momentum on planning for net zero and building out renewable energy targets. But at the same time they are getting hit by massive volatility in energy prices.”

“My one-liner to clients has been this: there’s plenty we don’t know about the energy transition, but what we do know is that there’s going to be increased volatility.

“That is the real challenge for companies on how they respond to that.”

Energy is a material input for many companies, meaning the cost of electricity, gas and fuel can be important factors affecting profitability.

Singh says this reporting season saw companies weathering energy volatility on the back of fixed price energy contracts entered before price rises.

“The question will be what happens when those contracts reset.

"Perhaps ironically, the companies that signed power purchase agreements using renewables are beneficiaries of this environment.

"Even though they may have signed their agreements at a higher-than-prevailing electricity prices a year ago, that’s a fraction of what the spot prices are now so they’re effectively hedged.”

Energy security issues and supply chain problems are playing out against the backdrop of decarbonisation across industry.

“Companies are scrambling to solve today’s supply chain and energy problems, but they are also in the medium to long-term grappling with decarbonisation goals.

“Previously, signing up to renewable energy, putting solar panels in and making your vehicle fleet a bit more efficient by buying EVs was easy. Now there’s a problem.

"You can’t get EVs, electricity prices are moving all over the place, and you can’t back it up with gas.

"There’s a lot more considerations that companies need to make because of this energy volatility.”

Industrial relations back on investor radar

Another ESG theme that emerged from reporting season related to labour supply, from COVID-related absenteeism to industrial action and wages.

“The federal government’s recent Jobs Summit elevated industrial relations back onto the national agenda, but it was already showing as an issue in reporting season,” says Singh.

Sustainable and 
Responsible Investments 

Fund Manager of the Year

“What we’re seeing is the importance of how companies do their human capital management – labour was taken as given but that’s changed. Labour has become harder to find.”

What does it mean for investors?

For labour, Singh says investors should seek to understand the nature of companies’ agreements with workers.

“When strikes in Sydney mean the trains aren’t working every second day, it provides a precedent for how things will get resolved going forward.

“If you’ve got an agreement that’s due for renegotiation in the next 12 months versus one that was signed for five years, that could have a material impact on your forecast growth of your labour costs.”

Look for energy security

For energy, security of supply is critical, says Singh.

Partly this can be solved simply through dealing with larger companies – “there’s security in size,” says Singh.

But it’s also important to seek security in geography, he says, using battery mineral lithium as an example.

“The two biggest sources of lithium are hard rock in WA and brine at altitude in the Andes in South America. The regulatory environment is a lot different.”

Singh says investors should seek out companies that are clearly facing up their energy problems no before the problems become more acute.

“That could be contingency plans in the short to medium term, but you also want to see evidence that the plans will enhance their transition in terms of energy efficiency, replacement of vehicles and investment in technology.

“The other thing that matters for investors is understanding the required capital expenditure.

"What’s the capital allocation to these initiatives? And is there an actual measurable benefit for the amount they are planning to spend?”


About Rajinder Singh and Pendal's responsible investing strategies

Rajinder is a portfolio manager with Pendal's Australian equities team. He has more than 18 years of experience in Australian equities.

Rajinder manages Pendal sustainable and ethical funds including Pendal Sustainable Australian Share Fund.

Pendal offers a range of responsible investing strategies including:

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Responsible investing leader Regnan is part of Pendal Group.

Contact a Pendal key account manager here

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What will Anthony Albanese’s new climate bill mean for Australian investors? Pendal’s MURRAY ACKMAN explains

THE Albanese government’s climate bill has cleared parliament, paving the way for a 43% emission reduction target by 2030 – and net zero by 2050.

How will that impact Australian investors?

Investment in electrification and mandated reductions in emissions for big companies will be features of the new plan, says Pendal’s Murray Ackman.

The bill legislates a greenhouse gas emission reduction target of 43 per cent from 2005 levels by 2030 and net zero by 2050, aligned with Australia’s Paris Agreement commitment to helping limit global warming to well below 2°C and ideally to below 1.5°C.

The three biggest sources of emissions in Australia are electricity, industry – which includes gas for industrial processes, domestic heating and the by-products of creating things like cement and fertiliser – and transport.

Source: Department of Climate Change, Energy, the Environment and Water

Electricity is the biggest category, says Ackman, a credit ESG analyst with Pendal's Income and Fixed Interest team. 

“Two thirds of electricity in Australia is generated by burning fossil fuels – mainly coal or gas – and one third is from renewables, mainly wind and solar,” he says. 

“Federal Labor policy is to increase the proportion of renewables to 82 per cent.” 

This will be done through a $20 billion investment in the electricity grid to increase the amount of renewables and safeguard the load with community batteries that are charged through rooftop solar.  

“Removing fossil fuels will require significant spending particularly in utilities and infrastructure,” says Ackman. 

“As well as government funding, there will likely be an important role for fixed income investors to provide debt to finance this spend.” 

Ackman says regulators incentivise investment in the grid, which offers opportunity for investors. 

“The way the regulator works is you get a mandated amount that you can get in terms of profit from any investments you make. 

“This will be significant for fixed income investors because much of the development will be debt funded. 

“And it will be significant for equity investors in the big resource companies who will be digging stuff out of the ground to build things.” 

Rewiring the nation

Ackman says the $20 billion in loans or equity to rebuild the electricity transmission network involves establishing a new body, the Rewiring the Nation Corporation (RNC), which will be a government-owned entity. 

“It’s a bit like the NBN using the blueprint outlined by the Australian Energy Market Operator. The RNC would partner with the transmission companies to modify and rebuild the network.” 

Another implication for investors will be in any mandated emissions reductions from the so-called Safeguard Mechanism that requires Australia's largest greenhouse gas emitters to keep their net emissions below a baseline. 

“The Safeguard Mechanism will begin operation in 2023-24 and apply to 215 entities that currently emit more than 100,000 tonnes of CO2 a year,” says Ackman. 

“They will be required to reduce aggregate emissions by 5 million tonnes a year to collectively achieve net-zero emissions by 2050.” 

These business include power stations, large foundries and mines and will each have a separate emissions reduction trajectory to be negotiated with the Clean Energy Regulator. They can cut emissions or offset them by buying carbon credits. 

Still, it's important to keep in mind that federal government targets are not the only ones that matter, says Ackman. 

Most of Australia’s emissions are from energy, industry and agriculture which is primarily the realm of state policy. 

“If you add up the state’s policies, Australia already has an effective 2030 target of 37-42 per cent emissions reductions. 

“If State renewable and energy targets for 2030 are met, 55 per cent of Australia’s electricity will be from renewables.” 

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We’re in an average recessionary market, but that doesn’t mean there aren’t opportunities, argues Pendal’s CHRIS LEES in this fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

Chris Lees, senior portfolio manager, Pendal Global Select Fund:


“If you don't think there's a banking crisis coming, then it's actually time to gently start buying again, and that's what we're doing.  

“We think that we're in a normal recessionary bear market. We're not going into, we think, a global banking crisis market.  

“Therefore equity markets around the world are probably in a double bottoming process.  

“So there are opportunities now for us to start adding into our funds for our clients. 

“In the post-Covid, post-recessionary world, as we look forward, healthcare looks really very, very attractive.

"We've got some fantastic growth stocks in the biotechnology tools, the biotechnology equipment, the biotechnology outsourcing world.  

“Those are fabulous businesses whose earnings have got nothing to do with oil, nothing to do with interest rates, nothing to do with all the current problems in the world.  

“Some of those stocks, a year or two ago, were very, very expensive. Many of them, the share prices halved now in this recessionary bear market, and yet their earnings are rock solid.

"Those are a fabulous opportunity for us to put into the fund for our clients." 


About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group's UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.


About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*

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Shopping centre owners and fund managers were the stand-out sectors in a strong reporting season for listed property, says Pendal’s JULIA FORREST

IT WAS a strong reporting season for ASX-listed property largely due to a post-pandemic bounce-back, says Pendal’s Julia Forrest. 

Owners of shopping centres, and property fund managers were the stand-out sectors, while office trusts were still struggling. 

Higher interest rates will have negative effects on the sector, but locally many Australian Real Estate Investment Trusts (REITs) have hedged against higher debt costs and offer reasonable value. 

The pandemic — and government regulations instituted in response — hurt revenue and profits in the property sector. But that’s now ended earnings across the sector were up 19 per cent last financial year — or 14 per cent if you exclude fund managers, Forrest says. 

For the owners of big shopping centres, it was a very good earnings season. 

“The malls had the biggest rental abatements during Covid, but they are now not too far off where they were pre-COVID. It is quite extraordinary that they’ve been able to come back to where they were FY19,” Forrest says. 

While things are improving, they aren’t back to ‘normal’. Vicinity Centres, which owns shopping centres across the country, reported 10 to 12 per cent lower foot traffic. 

“Foot traffic is returning on the weekends but not during the week. Having said that, sales have surpassed FY19 because we’re spending 30 per cent more when we do go to shopping centres,” Forrest says. 

“We don’t quite know how much of that is permanent but we are seeing food and beverage coming back in malls. Even cinemas are coming back.” 

The other stand-out sector within property was the fund managers, Forrest says, nominating Goodman Group, which focuses on industrial property, and Charter Hall. Both expect to maintain earnings growth this financial year. 

“It’s a function of assets under management. They have both been acquisitive the last year or two and they have big development pipelines, and they have the tail wind of asset values going up.” 

Industrial property was a particularly strong performer during COVID, as businesses scrambled for space to fulfil e-commerce sales. But unlike many other parts pandemic favourites, industrial remains strong.  

“Rental growth in the US is well over 20 per cent. In Europe its ten to 12 per cent. Australia has the lowest industrial vacancy rate in the world … and growth is around 20 per cent. Supply hasn’t been able to keep up with demand,” Forrest says. 

While fund managers and shopping centres are performing much better than during the pandemic, the outlook for the office sector is less certain. 

“In FY22 it was impacted by lockdowns again,” Forrest says. “It’s just a function of people not returning to work, though there’s a sense that it has started to improve in the past couple of weeks.  

“We got through COVID and the flu season … and maybe people want to be in the office because things are getting more difficult.” 

There has been a preference for better space, but vacancy rates remain high and more supply will hit the market in coming years.    

For investors looking at buying or selling property in a rising interest rate environment, Forrest says there’s three ways to think about interest rates.  

The first is ring interest rates make fixed income alternatives more attractive.

The second is that as rates rise, discount rates increase, and asset values fall. An exception she says is industrial space because demand is so high. And finally, the cost of debt rises.  

Fortunately, many companies in the REITs sector have hedged their debt exposure, so rising rates won’t hit interest costs too hard. 

“And the sector looks reasonable value,” Forrest says. “It’s trading at around 15 times which is a discount to the all-industrials… and excluding the fund managers, it’s at a 16 per cent discount to NTA (net tangible assets).” 

“We’re looking at EPS growth of a bit over three per cent … and an initial yield, excluding fund managers, of around five per cent, so eight per cent isn’t bad.” 


About Julia Forrest, Pete Davidson and Pendal Property Securities Fund

Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.

Pete Davidson is Pendal's Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

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Here are the main factors driving the ASX this week according to portfolio manager Jim Taylor. Reported by portfolio specialist Chris Adams

THE market was positioned for good news on the US inflation front – and took a hit when the CPI came in slightly stronger than expected.

A strong inflationary pulse across a broad range of categories ran contrary to a prevailing narrative of softer inflation.

In an environment where the Fed is driven by data – rather than by its own forecasts – sentiment on the monetary policy path shifted quickly.

The Fed funds rate is now expected to reach 4.2% in December 2022, up from 3.9%.

Equity markets took a hit. The NASDAQ fell 5.54% on the day of the data print – its worst fall since March 2020. The S&P 500 was off 4.3%, its worst since June 2020.

Poor sentiment was compounded by pre-released earnings from Fedex, which saw quarterly EPS at $3.44 versus $5.15 consensus expectations and an even bigger shortfall on next-quarter guidance.

Management cited softer demand, weakening further into the quarter’s end, both in the US and internationally. This exacerbated concerns around the economic backdrop.

The S&P 500 fell 4.7% for the week. The S&P/ASX 300 was down 2.2%.

US inflation

Headline CPI rose 0.1% month-on-month in August, against an expected decline of 0.1%. On an annualised basis inflation is running at 8.3% versus 8.5% last month – again higher than the expected 8.1%.

Core CPI rose 0.3% to 0.6%, higher than 0.35% forecast. Annualised, it is running at 6.3% m/m, versus 6.1% expected – the highest print since March.

The key concern was the breadth of disappointing numbers across multiple buckets including shelter (34% component), new and used cars (8%), medical services (7%), food away from home (5%), apparel (2%), utility gas service (1%) and motor vehicle repair (1%).

Inflation is no longer driven by energy and food.

Housing inflation is a slow-moving part of the US CPI data. Landlord rent expectations have fallen recently but will take a while to flow through into the data.

The next biggest segment is new and used car prices. These have definitely turned down, which is helpful.

Wage pressure in healthcare is a global phenomenon and is likely to continue ticking up as wage demands are met.

More positively, airline fares fell by 4.6% in August – less than expected. This should continue to fall as airfares follow jet fuel prices quite closely, and they have reversed most of the spike triggered by the war in Ukraine.

Food inflation is finally moderating. The 0.7% increase in food-at-home prices was the smallest since December, after seven straight 1%-plus increases.

Lower global food commodity prices are starting to work through, with more to come.

Petrol pump prices are down to $3.69/gallon – 26% below an all-time high in June and the lowest level in six months.

The “peak inflation” narrative is probably still intact, but the core components remain stubbornly sticky.

Producer Price Index data (see below) suggests some relief is on the way. But it won’t matter this week.

Fed officials have made it very clear they will not slow the pace of rate hikes until they see convincing evidence that core inflation pressure is easing on a sequential basis.

The chance of a 50bp hike this week has gone.

The market has wavered between a 20%-30% chance of a 100bp hike.

The chance of a soft economic landing has fallen for two key reasons:

  1. Strength and stickiness in both goods and services inflation indicate meaningful reductions toward 2% are impossible without a recession and a big fall in employment
  2. The risk of a Fed overshoot has increased, meaning a recession gets induced almost regardless of what the data does from here.
US PPI

The Producer Price Index data was more reassuring than the CPI print.

Headline PPI fell 0.1%, in line with consensus, helped by falling energy prices. Annualised, it is 8.7%. This is down from 9.8% in July and 11.2% in June.

The key message here is that Core PPI inflation is now falling across both goods and services.

Core goods rose at a 6.1% annualised rate in the three months to August, exactly half the peak pace in the three months to May.

Core services rose 3.9% in the three months to August. This was an even bigger slowing from the 10.8% peak in the three months to March.

Consumer inflation expectations have plunged for both the three and five-year time horizons.

Other US data

The Atlanta Fed Wage Tracker grew to 6.7%.

Companies that have high turnover of low-paid workers are feeling the full force of wage pressures in the economy. Wage growth for job switchers far exceeds that for people staying with their current employer. 

Retail sales were slightly disappointing with core sales down 0.3% versus flat expectations. 

But they haven’t fallen off a cliff and may reflect higher petrol prices over the past few months, which have now reversed.

Australia

GDP data in the second quarter showed continued strength in consumer spending, driven by a rebound in services. This included a quarter-on-quarter rise of about 30 per cent in tourism-related spending.

It seems likely that the consumer hangs in there for another few months, before feeling the pinch in the December quarter as increased mortgage rates flow through to household cash flows.

Employment increased 33,000 in August. This was in line with consensus but only partially reversed the prior month's 41,000 decline.

At the same time, labour participation moved back close to its record highs (66.6%) and unemployment ticked up to 3.5% (consensus expected 3.4%).

Hours worked also recovered most of the prior month's losses (0.8%) and the under-employment rate fell to 5.9%.

It’s notable that the number of workers affected by sickness remains nearly double its usual amount (about 750,000).

The data hasn’t moved expectations for another 100bps of tightening across Q4, taking rates to about 3.35%.

Europe

The EU has proposed a redistribution of excess profits from energy companies and non-gas-power generators (nuclear and renewables), totalling an estimated EUR 140 billion.

This would involve a price cap of 180 euros per megawatt hour, which would raise about EUR120 billion.

The balance would come from energy companies contributing a third of any profit more than 20% over the last three-year average.

The plan is complex and will take time to put into practice. Each member state would have jurisdiction over key aspects.

The plan includes a binding agreement to get winter peak electricity use down by 5% – and overall 10%.

Markets

Australia held up better than other markets last week due to index composition.

Large caps did better than small caps. Small resources and REITs bore the brunt of the sell-off. Interestingly, consumer staples did not prove to be defensive in the weak market and we saw a clean sweep of negative returns across all sectors.


About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

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