17 Mar 2023
US bank collapse pressures ongoing central bank tightening
Markets
- Local and global equity investors traversed a tumultuous week in economies and markets with concerns earlier in the week supplanted by central bank support later in the week.
- Investors were nervy following the collapse of US banks Silicon Valley Bank and Signature Bank along with European financial giant Credit Suisse asking the Swiss National Bank for assistance. Poor management and oversight apparent in both, with questionable hiring practices in focus, whilst not helped by the significant tightening of monetary policy.
- Bond market volatility soared this week as investors changed bets on an almost daily basis regarding central bank rate paths from here, with some pricing now indicating US central bank rate cuts as early as June this year. In stark contrast to a few weeks ago where expectations had risen to expect a 0.50% rise at the upcoming March meeting.
- In local news, banking and resource stocks were hit hard this week as concerns rose regarding the economic outlook – ie. potential for rising bad debts and a drop in demand for commodities.
- Origin Energy shares rose following a report that Brookfield Asset Management and EIG Partners could submit a binding $18.2 billion takeover offer for Australia’s largest energy retailer.
- Rio Tinto has finally begun digging copper from the underground portion of its giant mine in Mongolia, in what will be one of the world’s largest copper operations after years of delays, cost blow-outs, and costly disputes with the country’s government.
- Computershare, which benefits significantly from rising rates and bond yields as it holds billions in client funds, shares fell sharply as investors bet that central bank rate cuts may be near.
- Oil prices fell sharply to their lowest levels in more than a year as investors worried about widening pressures in the global banking sector and broader economic conditions in the period ahead.
Economics
- Australian employment rose by 64,600 in February following two previous months of falls, with the unemployment rate falling back to 3.5%. The February uplift came in well ahead of expectations, with the gain driven by a lift in full-time work whilst part-time jobs fell.
- The Westpac consumer sentiment index was steady in March but remains extremely weak, with the impact of high inflation and the RBA’s tightening cycle weighing heavily on consumers. The time to buy a major household item index fell to its third lowest reading on record whilst the time to buy a dwelling index fell to the lowest reading since 1989.
- The National Australia Bank business survey saw conditions hold up, but confidence fell in February. The key subcomponents of business conditions all remain at relatively high levels. In contrast, the confidence measure in the survey eased into negative territory.
- The return of net overseas migration continued in early 2023 with a further lift in permanent and long-term arrivals. Foreign students are returning whilst foreign inbound tourism is still lagging. The lift will help the labour shortage problem but will also add to the demand for housing.
- US consumer price inflation came in mostly expected with prices rising 0.4% in February, which saw the annual growth ease from 6.4% to 6.0%, the lowest level since September 2021. The core inflation measure (ex-food and energy) came in slightly above expectations with the annual growth not easing by much.
- The US government said that hiring grew solidly in some parts of the economy but slowed in others with 311,000 jobs added, coming in above expectations. Wage growth was below expectations, and the unemployment rate ticked slightly higher to 3.6%. The participation rate rose very slightly but remains well below pre-covid levels.
- US retail sales fell by 0.4% in February, in line with expectations, but well down on the bumper January figure.
- US consumer inflation expectations for the year ahead fell from 5% in January to 4.2% in February, versus expectations of 5.1%. The February number was the lowest since May 2021.
- US supplier prices fell in February from a month earlier, a possible sign of easing inflationary pressures.
- US housing market data mounted somewhat of a recovery in February with housing starts rising by almost 10% to a 1.45 million annualised rate whilst building permits lifted almost 14%.
- The European central bank raised Eurozone interest rates by 0.50% to 3.00%, but comments accompanying the increase were more dovish than expected.
- Basic pay, excluding bonuses, rose by 6.5% in the UK compared with a 6.7% increase in the December quarter, representing the first slowdown in that measure since late 2021.
- China reported a rebound in consumer spending, industrial output, and investment this year following the drop of covid restrictions. But it also warned of risks to the recovery as unemployment rose and the real estate investment slump continued.
Politics
- The US, UK, and Australia unveiled plans for a new fleet of nuclear-powered submarines. The deal deepens the defence partnership between the three aimed at countering China in the Pacific and upgrades Australia’s aging fleet. The upgrade won’t be cheap.
- Chinese lawmakers unsurprisingly unanimously voted to give Xi Jinping a third term as President, another 5 years in power. The country has a new Premier in Li Qiang, who pledged to shore up growth and restore business confidence.
- China announced it will resume issuing nearly all types of visas for foreigners starting on March 15, as the country takes another step in loosening covid restrictions.
- A Russian fighter jet and a US surveillance drone have collided in international air space above the Black Sea, causing the drone to crash.
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