AUSTRALIAN MARKET WRAP
Alongside the coverage of the Reserve Bank of Australia’s most recent increase in the official interest rate, and speculation about its future path, there was discussion about the potential overstatement of inflation, and therefore underestimate of real wage growth and productivity. Analysis suggested that effective inflation could be 0.85 to 1.1 percentage points lower when consumer substitution for cheaper equivalent products, and quality improvements in goods and services, are taken into account.
The Reserve Bank issued new quarterly economic forecasts, with expectations that growth would be 3.5 per cent this year and settle to 1.75 per cent in 2023 and 2024. Inflation is forecasts to reach in the region of 7.75 per cent by the end of the 2022 and decline to around the top of the target range (2-3 per cent) by the end of 2024.
Australian consumer confidence apparently sank 4.5 per cent last week, in the face of the latest increase in interest rates, reversing the previous three weeks of gains and landing at the lowest level since April 2020. In contrast, new data showed both business conditions and confidence picked up in July thanks to record levels of capacity utilisation, cost growth and price rises.
Meanwhile the US Federal Reserve was said to be seeking to dampen expectations that its rates hike cycle might be ‘almost done’. This was bolstered by new data which showed over half a million jobs (more than double expectations) were added to the US economy last month. The unemployment rate is now down to 3.5 per cent, the 50 year low seen just before the pandemic hit. The strong labour force outcome raised concerns that the US central bank will need to raise interest rates much higher, and for longer, than previously thought, in the face of resilient consumer demand.
The Australian Prime Minister has apparently been warned that the ‘crippling’ visa backlog, which is exacerbating the very tight labour market, and which is (ironically) being made worse by overseas staffing shortages in processing centers, cannot be resolved without a major expansion to Australia’s immigration program.
Australian indices
ASX 200: Was little changed this week, up 0.45%, to 7029.8 points at the close on Tuesday.
All Ordinaries: Rose 0.86% in the past week to 7278.6 points at the close on Tuesday.
Currencies
As at the close on 8 August, the AUD/USD was little up 0.27% on last week, at 0.6975. The AUD/RMB was also little changed, falling by 0.03% in the week to 4.7093.
Commodities
It was reported that the copper price rose on the back of the strong US jobs data. However, The Australian Financial Review opined that demand, and therefore the price, is unlikely to be sustained until China ‘abandons’ its COVID-zero policy and resumes growing. The Chinese economy accounts for half of global demand for cooper.
Domestic petrol prices were said to have fallen almost 20 per cent from their July peak, relieving some inflationary pressure. If maintained, this will reduce the political pressure on the Australian Government, ahead of September’s scheduled increase in fuel excise from the current ‘emergency’ level set by the previous government.
Government Bonds
The Australian Financial Review discussed the outlook for bond markets in the context of the increased tensions in the South China Sea, and asked if ‘economic war’ between the ‘east’ (including Russia) and ‘west’ would be inflationary; the conclusion was quite possibly ‘higher for longer’.
Government Bond Yields (Source: Bloomberg)
|
NAME |
COUPON |
PRICE |
YIELD |
1 DAY |
1 MONTH |
1 YEAR |
|
GTAUD2Y:GOV Australia Bond 2 Year Yield |
2.75
|
100.05 |
2.68% |
+3 |
+15 |
+267 |
|
GTAUD5Y:GOV Australia Bond 5 Year Yield |
4.75 |
107.55 |
3.00% |
-1 |
-14 |
+237 |
|
GTAUD10Y:GOV Australia Bond 10 Year Yield |
1.25 |
83.86 |
3.18% |
-3 |
-30 |
+198 |
|
GTAUD15Y:GOV Australia Bond 15 Year Yield |
3.75 |
104.25 |
3.36% |
-4 |
-27 |
+179 |
Reserve Bank of Australia Rates (Source:RBA)
|
RBA CASH RATE TARGET (RBATCTR:IND) CURRENT (per cent) |
MOST RECENT DECISION (percentage points) |
MOST RECENT CHANGE (percentage points) |
1 YEAR PRIOR (per cent) |
|
1.85 |
+0.50 (2 August 22) |
+0.50 (2 August 22) |
0.10 |
Property
New data show that rents have increased by as much as 34 per cent in inner city Melbourne, and 20 per cent in Sydney, over the last 12 months. This inflation is in the face of record low vacancy rates. The number of rental listings across the country have apparently fallen by a third compared with the five-year average, with no sign of supply increases despite the record prices. Expectations are said to be of more price jumps as demand increases further as migrants return to Australia.
It was reported that there was a surprise 36 basis point drop in property yields (in a portfolio of smaller retail and commercial properties) despite official interest rates rising by 50 basis points the day before. This was mooted to suggest that investors are becoming more comfortable with the rising interest rate environment, and also that expectations that rates might rise to over 6 per cent may be overblown.
It was reported that Iris Capital (owned by Sam Aranout) has outbid veteran Sydney hoteliers the Gravanis brothers in a race to acquire Casino Canberra from ASX-listed Aquis Entertainment, adding another trophy asset to the $5 billion hotel, pub and property development empire.
Alongside this, The Australian Financial Review ‘Rich Listers’ Sam Arnaout and Tim Gurner were said to be pushing ahead with plans to build $2bn of high-rise towers on the Gold Coast despite rising construction costs and a shortage of labour. And major developer Harry Triguboff has reportedly bought a site in the area for a $1bn, 1000 apartment, project, from Chinese owners looking to exit the Australian market. Tough cost and labour market conditions have apparently killed off almost $1bn of projects so far this year and created uncertainty for another 30 projects being sold-off-the plan in South East Queensland.
Venture capital
Stoic Venture Capital discussed whether more investment in ‘deeptech’ might be the silver lining to the tech sell off.
The Australian Financial Review carried a feature on the ‘silent crash’ in the venture capital market. The piece noted that, although there is a lag when compared with share markets, the significant valuation falls for tech companies forced to raise capital recently (Buy now, Pay later leader Klarna has seen its valuation fall to a level 87 per cent lower than last year) are a marker of things to come for private investors and entrepreneurs.
Aligned with this was a discussion about how the tight funding conditions for startups has changed the power dynamic with venture capital investors, lengthened the runway for raisings and made founders think carefully about their business conditions and trajectory.
The Australian Financial Review reported comments from Morgan Stanley Australia executives that merger and acquisition activity will rebound quickly once the market has adjusted to the change in trajectory of official interest rates. The head of its Australian operations suggested that the weight of available capital will ensure a quick pickup once asset repricing has been worked through. Key themes in the market were said to be the energy transition, digitisation, Australia’s ageing population and healthcare, and the search for real assets including infrastructure and property.
Company Updates
ENA Respiratory
Stoic investee ENA Respiratory has announced that it has achieved a significant milestone with the successful enrolment of all 123 participants in its Phase 2a flu-challenge study conducted at hVIVO. It noted that it will share the results of this study later in the year.
Cardihab
Stoic investee Cardihab have announced that Melissa Mail, an investment manager at Uniseed, will join their board. CEO Helen Souris was also involved in a new podcast series, Beyond the Medicine Cabinet, discussing the benefits and ongoing challenges of cardiac rehabilitation participation, and how technology is helping to provide more equitable access to programs for those in need.
