4 Aug 2023
Fitch downgrade hurts investor sentiment
Markets
- Local and global equity markets fell this week as investors reacted negatively to the US’s credit rating downgrade.
- US second quarter corporate earnings results moved through the half-way point with nearly 83% of companies beating consensus estimates. This is above the five-year average of 77%.
- In local stock news, Downer shares fell after the company wrote down assets, but the turnaround in the underlying business is progressing well under new leadership.
- TPG Telecom rallied on the news they are negotiating a sale and leaseback agreement of their non-mobile fibre assets with Macquarie-backed Vocus. The proposed sale would allow TPG to reduce their debt levels.
- The Australian dollar fell, and the US dollar strengthened, as negative risk sentiment rose following Fitch’s downgrade of the US’s credit rating.
Economics
- The RBA left the cash rate at 4.10% at the August meeting, the second consecutive hold decision, with the most recent inflation print likely helping the decision. The market currently expects at least one more rate rise before the RBA ends its rate hiking cycle.
- Australian retail trade fell by 0.8% in June, after rising by a revised 0.8% in May, with large falls in spending at department stores, other retailing, and clothing & footwear. Retail trade volumes fell in the June quarter, the third consecutive quarterly decline with volumes now at their weakest annual figure in the data series outside of the pandemic.
- Australian private sector credit growth slowed to 0.2% in June, with owner-occupier housing credit rising by 0.4% and investor housing credit falling by 0.1% in the month. This was the first decline in investor housing credit since June 2020. Business credit growth eased whilst we saw the highest annual pace of personal credit growth since September 2015.
- Australian house price growth slowed to 0.8% in July as property listings increased, particularly in Sydney. New housing lending fell by 1% in June, driven by owner-occupiers, whilst building approvals fell by 7.7% after a lift of 20.6% in May.
- Australia’s trade surplus rose by $11.3 billion in June, up from a downwardly revised $10.5 billion in May. Exports fell by 1.7% in the month whilst imports fell by 3.9%.
- Credit rating agency Fitch downgraded the US government’s credit rating to AA+ from AAA, citing expected fiscal deterioration over the next three years as well as growing government debt. Fitch forecasts US debt to reach 118% of economic output by 2025, about three times higher than the median among countries with a AAA rating.
- The US central bank’s preferred inflation measure, the PCE, rose 0.2% in June to be up 4.1% on a year ago, coming in below expectations and below the prior reading of 4.6%.
- A key US employment report showed private payrolls increased by a very strong 324,000 in July, coming in well above expectations for a 190,000 increase.
- A key US consumer sentiment index rose strongly in July, to the highest since October 2021, but came in slightly below expectations.
- A couple of US manufacturing indices rose in July but remain in contractionary territory for the ninth consecutive month.
- Data showed annual Eurozone consumer prices grew by 5.3% in July, in line with expectations, versus 5.5% in June.
- The Eurozone economy expanded by 0.3% in June quarter, coming in slightly ahead of expectations.
- German annual consumer prices eased from 6.8% in June to 6.5% in July, slightly below expectations. German exports increased by a weak 0.1% in June, below expectations.
- The Bank of England raised rates to a 15-year high of 5.25% from 5% and warned that borrowing costs were likely to stay high for some time.
- Prices in UK stores fell for the first time in two years, with shop prices 0.1% lower in July than in June. Annual inflation dropped to 7.6% in July from 8.4% in June.
- The Bank of Japan indicated it would adjust its massive quantitative easing (bond buying) program to allow 10-year government bonds to rise above their current limit of 0.5%. It kept the target for the 10-year bond yield at 0%.
- China announced new measures to boost consumption in their latest bid to boost the economy, with wide-ranging measures including removing government restrictions on consumption and improving infrastructure. This follows recently announced plans to boost consumer industries and grow an exchange dedicated to helping small firms get access to funds.
- China released stronger than expected manufacturing data reflecting an improvement in domestic demand, but the data point remains weak.
Politics
- South Korea has become the latest country to express concern Australia’s new emissions reduction policies could pose a risk to gas projects. The Koreans have asked Australia to exclude already planned gas investments from rules that will make new projects subject to stricter climate targets.
- Chinese firms are lining up to invest in South Korea’s battery industry because they want to use it as a gateway to the US market, undermining the Biden administration’s efforts to limit China’s involvement in the EV supply chain. Korea has a free-trade agreement with the US.
- Britain will grant more than 100 new oil and gas licenses in the North Sea as part of efforts to tap domestic supplies and become more energy independent.
- Former US president Donald Trump has been indicted in Washington on federal charges over his efforts to overturn the 2020 presidential election. Trump continues to lead polling in the Republican party primaries to be their presidential candidate in 2024.
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