For stocks and bonds, 2024 is in some ways shaping up like 2023, which begs the question: has the market stopped listening to Fed chair Jerome Powell?
Welcome to the Trading Day blog for Thursday, April 18. The ASX 200 index closed 0.5 per cent higher at 7642.10 points, ending a five-day losing streak. For stocks and bonds, 2024 is in some ways shaping up like 2023, which begs the question: has the market stopped listening to Fed chair Jerome Powell?
The Aussie dollar is near US64.51c.
Seven West Media chief executive officer and managing director James Warburton has finished up at the media company after five years, as flagged in December.
His replacement is the company’s chief financial officer Jeff Howard who will start on Friday.
The company’s chairman, Kerry Stokes, thanked Mr Warburton for his service and the search has begun for a new CFO.
Craig Haskins will be acting CEO until a permanent replacement is found.
For stocks and bonds, 2024 is in some ways shaping up like 2023.
As was the case in 2023, bond yields have risen sharply since the start of the year and are starting to affect stock markets in developed markets after they hit record highs in recent weeks.
Of course stocks outperformed during periods of rising interest rates in the past few decades. Interest rates rose as economic growth and corporate earnings accelerated and sustained downward pressure on inflation allowed central banks to cut interest rates to lower and lower levels each economic cycle and use unconventional monetary policy stimulus like quantitative easing.
The US 10-year bond yield fell from 16 per cent in 1981 to 31 basis points in 2020 as inflation was restrained by the globalisation of goods and labour markets combined with plentiful supplies of resources like crude oil. But deglobalisation, decarbonisation and geopolitical risks may make it harder to get inflation under control and limit the potential for interest rate cuts from here.
As US economic activity and inflation data exceeded expectations and rate cuts were expected to be delayed this year, the 2-year Treasury yield hit 5 per cent for the first time in five months this week.
The benchmark 10-year yield soared to 4.69 per cent from 3.88 per cent at the start of the year.
Similar moves up in US bond yields in the first few months of 2023 contributed to the US regional banking crisis. At that time there were expectations of several interest rate cuts in 2023.
Much as has been the case in 2024, those expectations of interest rate cuts in 2023 faded rapidly as the US Federal Open Market Committee continued to hike rates through July, and its members turned less dovish on the outlook for rates in their September “dot plot” of interest rate projections.
But as the 10-year bond yield soared from 3.25 per cent after the regional banking crisis to almost 5 per cent in early October, FOMC officials including chair Jerome Powell began to indicate that rising bond yields and tightening financial conditions could lessen the need for further rate hikes.
“Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening,” Powell said at the time.
“We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.”
By December, Powell said the timing of interest rate cuts was discussed by the committee.
Not only did the Fed decide against a December rate hike that its members had projected, officials also slashed their interest rate projections for 2024 and 2025. But cuts this year are now in doubt.
After three months of higher than expected inflation, Powell appeared to abandon his prediction last month that the Fed was “not far" from getting the confidence in falling inflation needed to cut interest rates.
“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said Tuesday at a panel discussion alongside Bank of Canada Governor Tiff Macklem at the Wilson Centre in Washington.
“Given the strength of the labour market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”
It didn’t cause much of an additional selloff in stocks and bonds because investors have already dialled back their rate cut hopes after strong inflation and economic data in recent months.
Moreover the stockmarket remains focussed on the economic outlook and the consensus estimate of an acceleration in annual earnings per share growth to 15 per cent per annum by year end.
But investor surveys and positioning measures suggest they are already positioned for that. And unlike October 2023 when he was worried about rising long-term bond yields causing tight financial conditions, Powell’s comments this week could indicate that he needs tighter financial conditions.
A US 10-year bond yield near 5 per cent could challenge the US sharemarket’s valuation given that it would erase the already skinny earnings yield of the S&P 500.
“The risk is that as the 2-year US Treasury yield consolidates at around 5 per cent, the ‘high for long’ narrative of last August-October, which at the time had triggered fears of eventual hard landing and had hit risk assets, is repeated going forward,” said London-based Nikolaos Panigirtzoglou, head of global derivatives strategy at JP Morgan.
Investors started April with “even more elevated” exposures to risk assets compared to last August.
He says the current market narrative and patterns are increasingly resembling those of the Northern Hemisphere summer of 2023, when soaring bond yields sparked a 10 per cent fall in the S&P 500, prompting the Fed to ride to the rescue with its “dovish pivot” away from rate hikes.
“As inflation surprises to the upside and Fed or other central bank rate cuts are priced out by rate markets, investors are starting to look at reducing overweights or adding hedges in risk markets such as equities and credit,” Mr Panigirtzoglou said.
“Last summer, the increase in 2-year US Treasury yields from a low of 3.8 per cent at the beginning of May to 4.9 per cent by the beginning of August was largely ignored by equity and credit markets.
“However, once 2-year US Treasury yields started consolidating at such high levels of 5 per cent or above, equity and credit markets started suffering from the beginning of August onwards.
“Between the beginning of August and the end of October, equity markets saw a correction of around 10 per cent.”
Australia's share market ended a five-day losing streak with a solid gain.
The S&P/ASX 200 index closed up 0.5 per cent at 7642.1 points on light volume after hitting an intraday high of 7656.8 amid positive offshore leads for banks and resources and a 0.4 per cent rise in S&P 500 futures.
The index had fallen as much as 4.1 per cent from a record high of 7910 at the start of the month, losing 3.1 per cent in its recent five-day selloff caused by surging bond yields and elevated geopolitical risks.
Eight of 11 sectors rose with tech, materials and financials outperforming.
WiseTech rose 2 per cent, BHP gained 1.5 per cent and NAB rose 0.9 per cent.
Telix Pharma leapt 9.4 per cent on strong revenue.
ResMed fell 4.3 per cent as Eli Lilly's weight loss drug helped sleep apnea.
Thursday's rebound came as bond yields cooled after hitting five-month highs this week on US inflation jitters and lessing hopes of US interest rate cuts.
Australia's 10-year bond yield fell 10bps to 4.28 per cent.
The strength in the labour market means it is hard to see the RBA rushing towards cutting interest rates soon, AMP deputy chief economist Diana Mousina says.
"We have been expecting the RBA to cut around mid-year, but the resilience of the labour market means a high risk that the first cut comes later in the second half of the year, even with our expectation that next week’s March quarter inflation data will show a further improvement in reducing the pace of inflation."
HSBC chief economist Paul Bloxham expects the RBA will keep the cash rate steady at 4.35 per cent through 2024, with cuts beginning in the first quarter of 2025.
"Today's (labour force) figures provide more evidence that it is still far too soon for the RBA to be considering rate cuts and that there is still a non-zero risk that the cash rate may yet have to be lifted further – that is, the next cash rate move could be up, not down," he says.
Commonwealth Bank economists still expect the first interest rate cut will come in September, while ANZ continues to tip the RBA will move in November.
CBA head of Australian economics Gareth Aird says the labour market loosened modestly in March. "But the pace of loosening in the official figures is quite modest when compared against economic growth, which is well below trend."
CBA expects next week's first quarter inflation data to show headline CPI increased by 0.7 per cent quarter-on-quarter and by 3.4 per cent over the year. "We continue to expect the RBA will commence an easing cycle in September 2024," Mr Aird says.
ANZ senior economist Blair Chapman says the labour market may be running slightly hotter than the RBA forecast at the time of its February Statement on Monetary Policy.
"The RBA was forecasting employment growth to slow to 2.0 per cent year-on-year and the unemployment rate to reach 4.2 per cent by the end of the June quarter this year. For that to be realised employment needs to fall slightly in the June quarter and the unemployment rate to increase faster than it has over recent months," Mr Chapman says.
"Our cash rate view remains unchanged on account of today’s data, we see the cash rate on hold at 4.35 per cent until a 25 basis point rate cut in November."
The latest labour force data is consistent with the risk of a later start to RBA interest rate cuts, according to RBC Capital Markets’ chief economist Su-Lin Ong.
"A patient RBA is likely to stay on the sidelines for some time," Ms Ong says.
"While most of the leading indicators point to labour market moderation ahead (vacancies, applications per ad, the employment components of the business surveys) it is possible that the starting point for the labour market is stronger than we thought. As always, when things shift a bit too quickly, it is prudent to await more data," she says.
"We suspect the patient RBA will adopt this patient approach and while next week’s Q1 CPI is important, the labour market developments suggest little will change at their upcoming May meeting and SoMP.
"Today’s labour force and its details are consistent with keeping its very mild tightening bias and desire to keep maximum policy optionality on the table. Coupled with the shifting global central banking narrative, it is also consistent with the risks to our RBA base case (two cuts in Q4 and two cuts in H1-25) of a later start and even more shallow cycle."
Listed Sydney financial services group Sequoia's chairman John Larsen will step down in the midst of legal challenges and a push by the group's significant shareholder to oust managing director and chief executive Garry Crole.
Mr Larsen on Thursday stepped down after five years of steering the ship, which has hit troubled waters this month. He will continue in his role as non-executive director and chair of the audit committee.
Charles Sweeney, who has been part of the board since 2019, is the new chairman.
The change comes after Sequoia was hit with defence and counterclaim proceedings by Tim McGowen in the Victoria Supreme Court earlier this month. Mr McGowen is counterclaiming damages in excess of $1.1m, the bulk of which comprises the deferred consideration that Sequoia did not issue Mr McGowen in light of the claims Sequoia has raised against Mr McGowen.
Sequoia alleges that Mr McGowen has breached various warranties and provisions of the share purchase deed in relation to its acquisition of Informed Investor from Mr McGowen and others in March 2022, and is seeking damages in the order of $3.5m from him.
Meanwhile, shareholder Glennon Capital and its director Anthony Jones are demanding Mr Crole and director Kevin Pattison be removed from the board and be replaced with its nominees Brent Jones and Peter Brook. Shares are flat at 51c in afternoon trade.
Household mortgage payments will make up 10.5 per cent of the family's disposable income by December – up from 10 per cent at the end of 2023 – when more fixed loans expire and reprice at higher rates, the Reserve Bank estimates.
While the RBA increased the cash rate by 425 basis points since May 2022 to 4.35 per cent, the average outstanding mortgage rate has only increased by 320 basis points, RBA economist Benjamin Ung says in his note in the RBA's Bulletin published on Thursday.
Only around 75 per cent of the increase in the cash rate has passed through to the average outstanding mortgage rate, compared with nearly 90 per cent over the course of earlier tightening episodes by the RBA in 2006 and 2009.
The reason is the share of fixed-rate housing loans increased substantially – from around 20 per cent of outstanding housing credit in early 2020 to a peak of almost 40 per cent in early 2022 – as borrowers took advantage of the low fixed rates on offer during the pandemic.
As of December, this share was 17 per cent, reflecting the expiry of a significant proportion of fixed-rate loans and the very low share of new loans on fixed-rates. "While the pace of fixed-rate loan expiries has slowed, there remains a substantial share of low-rate fixed-rate loans – around 35 per cent of the stock of fixed-rate loans that was outstanding in December 2022 – that will expire over 2024."
Star Entertainment Group fired seven staff members after they were found to have falsified welfare checks on hardened gamblers at its casinos, the second Adam Bell inquiry into its suitability to hold a licence has heard.
Former Star customer liaison manager Ronald Wagemans told the inquiry that an audit of the checks, which required customers to be approached and spoken to by casino staff if the gambling period exceeded three hours, found widespread falsification of records in relation to the policy.
Mr Wagemans said in one case earlier this year, guest support officers were alerted via an electronic tracking system to the fact that one customer had spent more than 3.5 hours gambling. While the customer was located in the casino, he was not spoken to by staff or asked to take a stipulated 15-minute break.
Mr Wageman said seven staff had been terminated for falsifying records after it was revealed the practice was "not isolated."
Slowing overall steel demand in China could weigh on global demand for iron ore and its price, RBA economist Adam Baird warns in the central bank's latest bulletin.
In his note on China's urban residential construction and steel demand, published on Thursday, Mr Baird notes investment in Chinese urban residential real estate has been declining since 2021, and demand for steel by the sector has also slowed considerably.
This has been due to policy changes with regard to stricter financial rules for highly-leveraged developers and demand-side tightening measures to curb sky-high house prices.
While overall demand for steel in China has been resilient due to strong growth in manufacturing and infrastructure investment, which looks likely to continue in the near term, the outlook to 2050 signals demand peaking.
"The decline in construction and in steel demand by the sector could weigh on overall investment growth in China in the long term and could also have significant implications for countries like Australia that export iron ore to China."
In 2022, China's share of world steel demand was 51 per cent and its share of world iron ore imports was 66 per cent. Iron ore futures on the Singapore exchange are near $US117.10 per tonne.
Anthony Miller to take over Westpac top job from Peter King in December. Star financial results, other updates awaited. Wall Street's ugly week of losses as soft US jobs data triggers hard landing fears.
CBA hits all-time intraday high. Macquarie up 2.3pc on the day. First Super's CFMEU-linked co-chair steps down after APRA action. Pacific Smiles CEO Andrew Vidler resigns.
