July Market update and Asset Returns

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Though it feels like the market has now bottomed out due to the sharp interest rate rises across alot of countries as we battle inflation that turns out isn’t that transitory. Some countries could still be in for a bit more hurt to come.

Economists have the USA on a 50/50 split of whether it will head into recession towards the end of this year, and while in Australia our tight labour market and wage inflation is helping combat the risk of us following suit; it is important to remember we are behind the curve when it comes to the cash rate.

Phil Lowe (Governor of the RBA) says that a normalised cash rate should be at 2.5%, however mentioned that we would need higher rate to curb out the private spending that is causing our inflation surge. Given our current rate is 1.35% we could expect another hefty jump in August, and probably a few smaller ones to round out the rest of the calendar year. NAB forecast the cash rate to be at 2.85% by the end of the year and Westpac are banking on 3.35% by February 2023. 

You can see alot of this reflected in their fixed mortgage rates as they are all sitting in mid 4s and some as high as 5%, current variable rates are still quite low, but if they follow the same trajectory as Wespac and NAB predict we could be at 5% with our variable easily by early next year.

FY21 saw the bond market wrap up their worst returns in quite a long time, as bonds that were yielding below 1% instantly became worthless as rates added on a percent in a couple of months. Bond yield should continue to grow and are expected to land around 3.4% for the 10 year by mid-23.

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The Aussie market continued to fall leading up to July, with the Tech sector, much like it’s overseas counterparts was hit hardest with the cash rate increases. We saw the Aussie tech space fall 28% compared to the total market being down only 8.7%. Consumer staples has managed to hold steady as they have passed on most their costs to the consumer, and the resource sector enjoyed a very nice upswing in demand, however that is starting to fade now.

Moving forward we should see the Aussie stock market continue to be a bit flat but it should be a positive flat. We will see the resource sector drop off a little bit from it’s high due to falling commodity prices, but everything else should should be okay. 

Consumer spending is still strong and hasn’t really be stifled yet from increasing prices, but their is the risk that it will occur and we just haven’t seen it yet. Businesses will need to tow a line between squeezed margins and squeezed customers if spending starts to drop as they feel the squeeze from rate rises.

But also it is important to understand that minimum wage and award workers are cycling a pay increase at the moment aswell, so that extra money may add some confidence if it isn’t immediately eroded by a 50 basis point rise in August. 

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The Global Bond market faired worse than the Australian market, as the US and UK have moved quicker than the RBA here in Australia (The FED moved 75 basis points in one meeting and expected to do it again, Canada move 100 points in one meeting!) and the rest of Europe was moving off negative interest rates. (which is something I still can’t get my head around).

The Ex-Aus bond index is down 14% for the year and we probably will continue to see a bit of capital value wash off the bond market as rates begin to normalise. Overseas they are battling a lot higher inflation than us currently which is what is causing the massive surge in the cash rate.

As we know the world market is down with the MSCI down 17.6%, but there is alot of variance in the sub asset classes just like here in Australia. Tech is down 28.8% but America is only down 16.1%, Japan is down 19.1% and Russia is down 28.4%.

We are expecting the US to worsen as it is a bet both ways whether they are heading for a recession and a fall in product output numbers indicate that businesses are at a low confidence. 

The constant lockdowns in China due to COVID have continued to put pressure on manufacturing and shipping, and that in turn has lead to higher shelf prices. If we start to see China return some form of normal we might see an easing in prices, but at the same time, once something is raised, it is usually hard to put it back down if consumers have accepted it at the new price. 

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