Asset allocation in uncertain times | What’s blunting monetary policy | Why services are weakening | Defining a true social bond

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

• Find out about Pendal Focus Australian Share Fund

MARKETS strengthened last week ahead of the US June CPI report and surged again when the cooler inflation data met with approval.

There was some consolidation on Friday as second-quarter US company results started to come through, though things were okay on that front.

The CPI print, bolstered by a supportive and instructive Producer Price Index (PPI) print, means the market now has peak Fed rates firmly in its sights.

Investors are pricing in one more 25bp rise in July. Some are even saying that would be one hike too many. 

The notion of a soft landing in the US gained further traction with a good labour market print and stronger consumer sentiment.

As a result, there was a notable improvement in the breadth of the equity market rally, though mega-cap tech performed strongly as well.

Commodities rose, notwithstanding some poor economic data out of China. The DXY — a trade-weighted index of US dollar strength — headed to 12-month lows.

The S&P 500 rose 2.44% and the S&P/ASX 300 was up 3.73%.

Central bank watch

Fed commentary last week was mostly hawkish, persisting with the line that there is more to be done.

Mary Daly of the San Francisco Fed noted that “we are likely to need a couple more rate hikes this year”.

Fellow non-voting FOMC member Loretta Mester, of the Cleveland Fed, agreed there was “more tightening needed”.

The market, though, was not buying this line. Scepticism may have been bolstered by the resignation of St Louis Fed president James Bullard.

Bullard had been among the most hawkish members of the FOMC, pushing for stronger moves to fight inflation over the past two years. He leaves to take up an academic post.

There was a slightly softer line from Atlanta Fed president Raphael Bostic (another non-voting member), who said policy makers “can be patient” given that we are “in restrictive territory”.

Michael Barr (who is on the Fed board of governors and was the only voting member to speak), noted the Fed had made progress and was “close” to a sufficiently restrictive level — but “still have a bit of work to do”.

Elsewhere the Reserve Bank of New Zealand left the official cash rate unchanged at 5.5%, as expected.

This was its first pause since it started lifting rates in October 2021.

US macro

June’s CPI came in 0.2% higher than May — below the +0.3% consensus expectation.

On an annualised basis it was 3% — also below the consensus of 3.1% and the lowest rate since March 2021.

Core CPI (which excludes food and energy), was up 0.2%. This was down from 0.4% in May and below the expected 0.3%.

Annualised Core CPI is running at 4.8%, versus 5% expected. It is at its lowest since October 2021.

Importantly, the shelter component has now fallen from a peak of 9.5% down to 5.5%. Based on effective rents, this will continue to fall for the rest of the year.

Used car prices fell 4.2% — the biggest monthly drop since the pandemic’s early days. This component accounts for about 4% of the CPI basket.

This well-received reading was supported by the PPI which rose 0.1% in June on a headline and core basis. This was below consensus expectations of 0.2% and the third straight month of a 0.1% gain.

Core PPI is running at 2.4% versus 2.6% in May. But the annualised three-month rate is 1.0% — its slowest rate since early 2020.

It is expected to be at 1.5% in August and may turn negative given leading indicators of downward pressure on prices.

All this was seen as a signal of further weaking pressure on the CPI.

As inflation falls, there was some resilient economic data prints, which fed the narrative of a soft landing.

• Consumer sentiment measured by the University of Michigan’s index rose from 64.4 in June to 72.6 in July — well above the consensus of 65.5. That said, it’s worth noting that 5-to-10-year inflation expectations remain elevated versus pre-pandemic levels.
• Initial jobless claims fell to 237K from 248K, well below the 250K consensus

Australian macro

The Westpac-Melbourne Institute consumer sentiment index improved by 2.7% in July, up from a 0.2% in June.

However it remains in “deeply pessimistic” territory.

Underlying sub-indices were mixed.

Perception of family finances have fallen to new cycle lows, but perceptions around the broader economy and the housing market have seen something of a rebound.

China macro

Beijing is grappling with a deflationary problem, which bodes poorly for growth.

Its CPI was flat at 0% year-on-year for June — the lowest print since February 2021.

The PPI is deflationary, running at -5.4% year-on-year versus -4.6% in May.

This suggests already-weak domestic demand continues to soften. Services consumption is recovering, albeit slowly, while housing demand remains subdued.

There were some signs of life in credit.

Aggregate financing — a broad measure of total credit — was CNY 4.2 trillion higher in June, versus CNY 3.1 trillion expected.

There were CNY 3.02 trillion in new loans. This should eventually feed through to increased new activity.

Deputy Governor Liu Guoqiang of the People’s Bank of China (PBOC) sought to calm concerns over the economy.

The bank retained “ample policy room to deal with unexpected challenges and changes”, he said. There was a need “to be patient and confident in the economy’s continued and steady growth”.

There are also signs Beijing is easing pressure on China’s tech sector. The PBOC noted that most of the issues at Ant Group and Tencent had been dealt with.

Earnings expectations

As we move into US quarterly reporting season, the market is expecting a 7.1% year-on-year decline in earnings for the second quarter of 2023.

This is slightly worse than the -7% expected on June 30.

If this transpires, it would be the biggest quarterly earnings decline since Q2 2020, when earnings fell 31.6%.

It would also be the third straight quarter of declining earnings.

So far 6% of S&P 500 companies have reported, with 80% delivering a positive EPS surprise and 63% a positive revenue surprise.

JP Morgan, Citigroup, Wells Fargo and Delta Airlines kicked off the season with decent results.

Leading into the Australian reporting season in August, the market is expecting 0.7% aggregate EPS growth for FY23. This is down from more than 10% a year ago.

Banks are expected to deliver 15.1% EPS growth on the back of higher margins, though this is expected to fall 5.3% in FY24 as those tailwinds recede.

Resources are the drag, with expected EPS down 17.4% in FY23.

Industrials (excluding resources, banks and listed property trusts) are expected to see 19.5% EPS growth for FY23.

Markets

A perceived end to the US hiking cycle saw technology-related stocks go on a tear last week.

The S&P 500 is now 3% higher than when the Fed started hiking rates in March 2022.

In Australia the IT sector rose 6.25%, led by Square (SQ2, +15.54%).

Materials (+5.76%) were also strong despite ongoing Chinese economic weakness. Part of this was strength in the gold miners on a weaker US dollar.

Evolution Mining (EVN, +17.08%) was the best performer in the ASX 100. Generally stronger commodity prices also buoyed Alumina (AWC, +9.33%) and South32 (S32, +7.63%).

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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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Diversified approach to ESG | A watch-out on AI stocks | Why our EM PMs like Brazil | Assessing WA’s green bond

Among emerging markets, Brazil is providing investors with opportunities, argues Pendal senior fund manager JAMES SYME

• Brazil took its medicine and is now reaping rewards
• Growing investor opportunities in emerging markets
• Find out about Pendal Global Emerging Markets Opportunities fund
• Watch a short Emerging Markets overview webinar with James Syme

BRAZIL’S central bank, Banco Central do Brasil, was one of the first global monetary authorities to start lifting interest rates.

It was tough medicine but now the top-ten economy is reaping rewards earlier than its peers,” argues James Syme, co-manager of Pendal Global Emerging Markets Opportunities fund.

Syme and his London-based team EM take a top-down, country-level approach to the asset class.

“Brazil’s central bank has run orthodox monetary policy for three or four years, more so than most other central banks,” Syme says.

“When they started hiking rates in the first quarter of 2021, Covid was still a huge problem in Brazil. But inflation expectations pushed above target, and they ultimately pushed rates to 13.75 per cent.”

The early shift is now paying dividends.

“Brazil took the medicine and on the back of that it got anchored inflationary expectations and a strong currency,” Symes says.

“First-quarter 2023 GDP came in at 4 per cent, and consensus was 3.1 per cent. The May inflation number was expected to come in above 4 per cent but came in below 4 per cent.

“There has been very significant disinflation in the economy and inflation is now around the central bank’s target range.”

Banco Central do Brasil will cut rates at some point in the next year, Syme says, though they will do it cautiously.

He expects rate cuts, ultimately, will exceed 300 basis points.

“When these rate cuts come through, they will happen in an economy that’s already, on the domestic front, growing quite strongly,” he explains.

“Across the domestic economy there are strong positive numbers and beats relative to consensus, despite there being no rate cuts yet. And that’s a really exciting environment.”

Stable currency

A reason why Brazil will keep growing, according to Syme, is the stable currency, the Brazilian real.

It was sold off during Covid, losing nearly 50 per cent of its value against the US dollar. More recently it has appreciated against the greenback.

“That strength in currency reduces the cost of imported goods, which are a meaningful part of the inflation basket,” Syme says.

“So in economies like Brazil, a strong currency reduces inflation which enables more rate cuts..

“In emerging markets, typically everything goes wrong, or everything goes right.

“If things go right, you typically get capital inflows, a stronger currency, a better inflation outlook, the prospect for yields to fall, equities going up along with economic growth, and that eases any political stresses.

“And we think that is where Brazil is now.”

EM stand-outs

Brazil is the stand-out example of a number of emerging economies that pre-Covid struggled economically but are now providing investors’ with opportunity, Syme argues.

“We are seeing broadly similar patterns in India, Indonesia and Mexico.

“Long, deep downswings tend to be followed by long upswings and that’s broadly what we expect will happen with these economies.

“Brazil really has been the surprise. We thought rate cuts would be needed to really get the economy going.

“But it seems that through what higher commodities and prices are doing to the economy and through the natural tendency for the domestic economy to recover, Brazil is doing well already with the potential for more good news when the cuts come through.”

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week according to our head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

EQUITIES continue to rally even as bond yields rise on the back of the Fed’s “hawkish pause” which held rates steady but added in a second rate rise by the year’s end to the “dot plot”.

The market is not convinced of the need for that hike, with CPI data indicating inflation is coming down.

There has been some good news recently.

While it has been a relatively narrow cohort driving the market’s momentum, we have seen some broadening in recent weeks. For example, the Russell 3000 index of US small caps is up 5.8% in June.

The S&P 500 gained 2.6% last week and has broken through the 4350 resistance level, with technical investors suggesting it could now retest the highs of January 2022 at about 4800.

The economy also looks to be holding up, with industrial companies like Honeywell signalling things are not as dire as some would suggest.

All that said, complacency is high.

Markets can enter the doldrums in the Northern Hemisphere summer. The liquidity environment may turn negative as the US Treasury rapidly refill their coffers, having run them down during the debt ceiling stand-off.

This could prompt a decent retracement in equities.

The S&P/ASX 300 gained 1.8% for the week, helped by a 3.06% gain in the resource sector as people hope that Beijing will blink and pull the traditional property and infrastructure stimulus lever in response to a disappointing economic recovery. 

US inflation

While there are myriad ways to measure inflation, the overall trend is one of incremental improvement on signs that underlying inflation is falling.

The headline US Consumer Price Index (CPI) rose 0.1% in May and is running at 4.0% annualised. This was broadly in line with expectations.

The impact of food and energy has swung about from driving about 4% of inflation in mid-2022, to now having zero impact in aggregate.

The breadth of inflation across different categories is also moving in the right direction. The number of categories growing at greater than 5% has fallen from almost 75% in mid-2022 to roughly 40% now.

Core CPI rose 0.4% month-on-month and on a three month-moving-average basis remains stuck in the low 0.4% range.

This is still higher than the Fed wants to see.

However the market is taking a sanguine view, expressing confidence that inflation will head lower in coming months, driven by:

1. Used car prices falling back. These added 15bp in May, but auction prices are falling. Auto assembly is also ramping up, which means more new car inventory, more competition and reduced margins, helping inflation.

2. Rents are set to drop. Owner Equivalent Rent is stuck at 0.5% month-on-month on the lagged effect of previous rent rises. But this has largely played out now, according to Cleveland Fed. Owner equivalent rent should fall materially based on leading indicators.

In combination, there is a view that these trends can shift annual core CPI from 5.3% to 4.2% by the end of 2023.

As an indication, inflation ex-rents and used vehicles is running at a three month annualised rate of 2.8%.

Personal Consumption Expenditure (PCE), which the Fed place emphasis on, could fall from 4.7% to 3.7%. It is declining more slowly due to the effect of higher health care and financial services representation in the basket. 

Finally, the University of Michigan survey of inflation expectations showed that the median expectation of inflation in one year had dropped by 0.9% — more than was expected — to 3.35%.

The ten-year median fell by 0.1% to 3%, which was in line with expectations.

Fed meeting

The Fed’s meeting was described as a hawkish pause.

Chair Powell kept rates unchanged, as previously flagged, but simultaneously sent a more cautious message via the commentary and dot plots.

The FOMC is now signalling two more hikes this year, versus only one back in March.

In his commentary, Powell suggested he is considering moving to hikes in alternate meetings. This is relevant because it would mean a hike in July – as the market expects – but then a second in November.

This is a long time away and a lot could change by then. So while the market moved, two year yields only rose by 12bps. 

The Fed’s statements and actions appear to be at odds. Why pause when you are also raising the amount of hikes you believe are required to bring inflation into range?

The logic could be:

1. Having pre-committed to a pause, they didn’t want to do an about-face

2. With inflation falling, the Fed may see risk-reward as more balanced between inflation and recession, so can be more patient

3. The Committee may be more hawkish than Powell and this statement was the quid pro quo for a pause

4. The Fed is concerned the market would react too positively to the pause, leading to looser financial conditions

US bonds have rallied from March, fuelled in part by concern over the economic impact of the banking crisis. However the economy has held up better than feared and, while inflation is falling, it remains sticky at around 3.5-4.0%.

So the current yield curve suggests the market is no longer looking for rapid easing in 2H 2023.

The reason the Fed remain wary is that while the momentum of the economy is slowing, the absolute level of activity remains high.

This is reflected in a tight labour market and stubbornly high wage pressure, manifesting in unit labour costs and wage expectations.

The Fed’s six-monthly monetary policy report (MPR) was released to Congress.

It noted the labour market remains “very tight”, despite some signs of easing, versus the “extremely tight” of the previous report.

They therefore believe that core services inflation “remains elevated and has not shown signs of easing”.

It does indicate that they still expect some impact from credit tightening post the bank failures. It also included the imputed level of rates based on the Taylor Rule, which would be 6%.

Rest of the world

The European Central Bank raised rates 25bp to 3.5% and signalled another hike in July, blaming resilience in employment and inflation signals surprising to the upside.

The market is pricing in an 80% chance of a further hike in September.

There is a lot of chatter around potential stimulus in China, which did see a small rate cut in its seven-day reverse repo rate last week, signalling the direction of policy.

Issues such as youth unemployment rising to 20% are seen as driving the requirement for Beijing to act, with commodity plays strengthening in response.

Australia

Good employment data validated the message from the RBA that more rate hikes are needed.

Australia is in a different place to the US, reflecting accelerating wage increases, poor productivity, rising house prices and strong immigration underpinning the economy.

The domestic bond market woke up to this last week with some big moves in yields.

• Two year bond yields rose 19bps to a new cycle high of 4.2%. This is the highest level since 2011 and we have now seen yields move 136bp higher since the lows of the US bank crisis. This has had no impact on equities.
• Five year yields also broke out to new cycle highs of 3.95%. This is also the highest since 2011.  
• Ten-year yields are holding in better at 4.03% — not yet back to the 4.2% seen in October.

The net result is that the ten year versus two-year yield curve has inverted for the first time since 2008.

This is a negative signal for the economy, although we note that the curve first inverted in mid-2006 and equities continued to rally through to late 2007.

So this is not necessarily a flag for near-term falls in equities.

Markets

The S&P/ASX 300 continues to rally and is up 4.89% CYTD, versus 15.78% for the S&P 500 and 31.35% for the NASDAQ.

Miners led the market last week on hopes of China stimulus, with Resources up 3.06%. They are now outperforming the S&P/ASX 300 over CYTD, up 7.19% despite the price of iron ore being flat and lithium  falling about 30%.

Information Technology continues to run, up 4.26% for the week, following the US lead.

Healthcare (-5.69%) was a laggard, largely down to a downgrade from CSL.

 

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

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

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Take care with US valuations | Time to consider 10-year bonds | What to look for in AI stocks

Investors must collaborate on policy advocacy to protect biodiversity, because individual investor efforts are less likely to succeed, argues Regnan’s OSHADEE SIYAGUNA

• Conservation efforts failing to protect biodiversity
• Policy intervention required
• Download Regnan’s Beyond Biodiversity guide
• Find out about Regnan Global Equity Impact Solutions fund
• Find out about Regnan Credit Impact Trust

Investors should collaboratively prioritise policy advocacy to protect biodiversity, because individual investor efforts are less likely to succeed, says Regnan’s Oshadee Siyaguna.

Siyaguna’s new research paper Beyond Biodiversity sets out six guiding principles for investors to guide the stewardship of ecological and social — or “biocultural” — systems.

Most of the world’s GDP is dependent in some way on nature, but historical efforts at protecting biodiversity, nature and ecosystems have repeatedly failed to achieve their goals.

Siyaguna says a deep interconnectedness between natural systems and thousands of years of human intervention complicate stewardship efforts — meaning a holistic and inclusive policy approach is needed to drive results.

“Advocacy has to be top of the list for investors,” says Siyaguna, a thematic analyst at sustainable investing leader Regnan.

“Essentially, that means investors standing up and saying policy has not been adequate.

“It’s very clear that it needs to be policy led, because as soon as policy changes, everything else will start to fall in line.

“In the absence of holistic regulations, issuers are likely to consider biocultural issues as an externality, which makes it difficult for investors to engage with them.”

Siyaguna says most conservation efforts fail because of a lack of appreciation that natural systems are complex adaptive systems coupled with a flawed framing of “nature” as separate from people.

“We’ve got to stop thinking of ‘nature’ — pristine forests and animals and so on — as a separate system and start thinking of it as a system that constantly interacts with people, economic and political activity.

“People have been transforming landscapes for at least 12,000 years. Nature as we see it now is a product of that transformation. People and nature are inseparable.”

The implication is that traditional conservation actions like fencing off pieces of land is sub-optimal and in some instances counterproductive.

“It is fundamentally impossible to go back — the system has evolved,” says Siyaguna.

“People evolve, environments evolve, economies evolve. Everything constantly changes.

“You are trying to revert to a year in the past without asking yourself ‘why?’”

Siyaguna says preserving the integrity of biocultural systems should be high on investors’ agenda because the deterioration of these systems undermines the stability of our economic, social and political systems.

But he says a new approach needs to be built that takes a systems view that includes both nature and people.

“Distinctions that separate humans and nature are somewhat artificial.

“The planet does not care how it survives — but we care because we need to live on it.

“Our goal should be to keep nature operating within thresholds that are productive to us.”

Siyaguna’s research aims to look at biodiversity in a new way.

Instead of trying to save and protect each ecosystem on its own, the approach is to focus on ‘biocultural resilience’, to make nature, society, and culture stronger and more adaptable.

The case for bonds as rates push towards recession | How China’s weaker economy impacts bond and equity investors | Diversification benefits of impact investing

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

• Find out about Pendal Focus Australian Share Fund

THE domestic market seems to be awakening to the realisation that Australia and the US are at appreciably different stages of this rate-raising cycle.

It will be interesting to observe the extent to which domestic equity sectors begin to de-sync from global momentum trends, reflecting the heavy lifting still required to tame inflation domestically.

Last week the S&P/ASX 300 shed 0.33%.

On a brighter note, the S&P 500’s +0.41% weekly gain meant it technically entered a bull market; up 20% from the 52-week low (Oct 22).

The NASDAQ gained 0.15% — it’s seventh consecutive weekly rise.

US small caps are rebounding and market leadership is broadening from the “mega-tech” names to autos, airlines, energy, machinery, building products and banks.

RBA hikes rates

The RBA increased the cash rate +25bp to 4.1% at June’s board meeting.

The outcome was a hawkish surprise relative to consensus expectations.

Two-thirds of 30 economists surveyed by Bloomberg were expecting a pause, while financial markets had only around +8bp priced ahead of the meeting.

The RBA noted they were looking “to provide greater confidence that inflation will return to target within a reasonable timeframe”.

They also referenced rising house prices and accelerating public sector and administered wages.

Some key observations of the RBA’s release:

• The RBA retains a bias towards further tightening, noting “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”.
• Inflation: “While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas.”
• Wages: “Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year”. The RBA reiterated that “unit labour costs were also rising briskly, with productivity growth remaining subdued”. The latter point was confirmed by subsequent data.
• Labour: “Conditions in the labour market have eased” but “remain very tight”. The unemployment rate, which has “increased slightly” to 3.7% in April, is “still very low”.
• Housing: “Housing prices are rising again”. While “some households have substantial savings buffers, others are experiencing a painful squeeze on their finances”.

Governor Lowe reiterated these points at a subsequent conference.

Now that house prices were rising again, they had shifted from a headwind to a tailwind for consumer spending, he emphasised.

He also noted that labour productivity remained poor, public sector wages were going up and services inflation remained sticky elsewhere in the world.

Lowe wanted to “make it clear … that the desire to preserve the gains in the labour market does not mean that the board will tolerate higher inflation persisting”.

The board couldn’t just “sit idle” given these risks and there was a limit to their patience on inflation.

The “unevenness” of the effect of higher rates across the community was “not a reason to avoid using the tool that we have”. 

The sum effect was that the three-month interest rate implied by bank bill futures had shifted from a peak of about 4.1% in September to a touch under 4.5% by December.

There have also been nearly three more hikes priced into the outlook in the past month.

Australian Q1 GDP and other data

The punchline is that the GDP data release painted a picture of an economy slowing materially.

GDP grew 0.2% sequentially in the first quarter — a touch softer than the +0.3% consensus forecast.

This was the third quarter in a row in which growth slowed. Annual growth now sits at 2.3%.

There were a couple of bright points. Business investment (3.4%) and public investment (4%) accelerated in the quarter, reflecting eased supply constraints to a degree.

On the negative side:

• Consumer spending increased only 0.2% for the quarter (3.5% annual). Spending on essentials rose 1.1% for the quarter, but discretionary spending fell 1.0%. This is an important trend to monitor.
• The savings rate fell to 3.7%, below its pre-Covid average.
• Disposable income fell 4% year-on-year in real terms, the biggest annual decline since 1983. While wage income has been strong, the effect of higher taxes (+15% yearly) and interest costs (+107% yearly) are providing a material drag.
• Labour costs are still accelerating. Total Compensation of Employees (COE) has risen 10.8% for the year – the strongest rate since 2007 – given the still tight labour market and rising wages. Productivity continued to decline. GDP per hour worked fell 0.2% quarterly and -4.5% over the past year. This meant that unit labour costs (wages adjusted for output) accelerated in Q1, up 2% for the quarter and 7.9% for the year.

On the housing market, data from CoreLogic showed 11.7% annual rent growth in Australian capital cities in May — a record high. The national vacancy rate is near a record low at 1.2%. New listings are a third below the long-term average.

This suggests little relief for Australian renters through to the end of the year.

US economy

Headline initial jobless claims rose to a cycle high of 261k, ahead of 235k consensus expectations.

The next few data points are likely to be a little messy given auto makers re-tool over summer. 

The May ISM services index from 51.9 to 50.3. There is a clear shift down following a period in which services remained resilient compared to manufacturing.

At a sub-sector level, declines in the employment and prices indicate slower growth in payrolls and wages. This is good news for the Fed.

Other snippets to note:

• The NY Federal reserve Global Supply Chain Pressure index has hit a record low point extending back to 1998.
• The prime age workforce participation rate moved up to 83.4% in May. This represents 65% of the total workforce. Participation among workers aged 55+ was unchanged at 38.4%.
• The RealPage rent measure came in at 2.3% year-on-year in May, down from 15.6% a year earlier. This is a lead indicator of the rent component of the PCE, which was still at 8.4% for April and is likely to see a substantial fall. This highlights an aspect of the difference between Australia and the US at the moment.
• The three-month moving average Service PMI for prices has fallen sharply this year. It leads the core PCE for services, which is likely to slow significantly for the rest of 2023 and into 2024.

Rest of the World

The Bank of Canada raised rates 25bps to 4.75%. This followed a pause, and was contrary to most expectations.

China’s exports declined 7.5% yearly in May, versus consensus expectations of -1.8%. Exports to the US (-18.2% yearly) and the European Union (-7%) and ASEAN (-15.9%) declined sharply.

The EU slid into technical recession with GDP for the three months to March 23 at -0.4%. The

ECB remains on track for its eighth consecutive rate rise.

Markets

Markets remained gripped by AI mania.

Last week was the biggest weekly inflow in listed technology companies in history at about $9 billion, according to market analysts EPFR. That’s about 40% more than the next biggest inflow in 2021.

The Bureau of Meteorology has announced that the El Niño-Southern Oscillation (ENSO) had shifted from “watch” to “alert.”

This means about a 70% chance of El Niño forming in 2023 — roughly three times the normal chance of an El Niño in any given year. After three years of high rainfall, the “weather ate my homework” excuse may be taken off the table for many companies. 

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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