NEWS + VIEWS – 19/4/2024
Markets
Markets dropped this week after another hot inflation report signalled that the US Federal Reserve (the Fed) will not be in a rush to cut interest rates this year. Investor sentiment was further dampened following the release of the Fed’s March meeting minutes, which reflected concerns that inflation isn’t moving quickly enough towards the Fed’s 2% target. The Consumer Price Index (CPI) rose 0.4% in March versus estimates for a 0.3% monthly increase.
Also weighing on investor sentiment was Iran’s launch of drones and missiles at Israel on Saturday night, marking the first direct attack on Israel from Iranian territory. While the majority of threats were intercepted, concerns of retaliation remain. The volatility index VIX is at its highest level since October.
The US first quarter earnings season kicked off last Friday. While around 10% of S&P 500 companies have reported so far, more than 75% have exceeded expectations, according to FactSet.
US inflation higher
Since the US core CPI rose strongly for the third month in a row, the Fed may delay cutting rates and may not cut at all this year if inflation stays high according to Kieran Davies from Coolabah Capital Investments (CCI).
CCI recently cautioned that the March CPI was likely to be a pivotal event for markets as investors seemed to be underestimating the risk posed by sticky services inflation.
As it turned out, this high core inflation print has triggered a significant reassessment of market views on US interest rates staying higher for longer.
The chart below shows that core inflation has picked up sharply over the past few months, which has led the market to rein in its earlier expectation that the Fed would aggressively cut rates.
On the one hand, core goods prices continue to trend downwards, declining at an annualised rate of more than 1% (see chart below).
On the other hand, services inflation remains sticky and has picked up. The chart below shows that core services inflation has recently reached around 6.5%, up from a low of about 4.5% in late 2023. Excluding housing, it has reached an even higher 7.7%.
Higher inflation will make it unlikely that the Fed will cut rates at the June policy meeting, which suggests that the window for the start of rate cuts will shift to the September meeting. However, if the poor run of inflation numbers persists, then it would raise the risk that rates will stay high all year.
The market is drawing a similar conclusion, expecting less than two rate cuts this year, with the first cut fully priced in by the September meeting.
In CCI’s view, the market’s reassessment of interest rates staying higher for longer presents a major challenge to the pricing of ‘risky’ assets, such as shares, real estate and private equity. Since the beginning of April, both the S&P 500 and the ASX 200 indices have fallen around -4%.
As for other central banks, US problems with sticky services inflation will give them pause for thought as some policy makers believe that the US is a little more ahead of the cycle than in other advanced economies given that it emerged from COVID lockdowns sooner.
Company News
BHP and Rio Tinto (RIO) maintain guidance
In its third quarter update yesterday, BHP reported a 7% increase on the previous quarter in copper production and a 6% lift in metallurgical coal. While the miner’s iron ore production fell -7%, partly due to heavy rainfall, it has held firm with its guidance of between 254 Mt and 264.5Mt for FY 2024. Copper production guidance also remains unchanged.
RIO on Wednesday announced that its production across all commodities fell in the March quarter compared to the previous quarter. Iron ore production was down -11% and copper -3%. However, it maintained its shipment, production and operating costs guidance for FY 2024.
While iron ore prices declined by -27% over the quarter, copper prices rallied more than 11%, driven mainly by rising demand and supply disruptions.
CommBank PERLS XI (CBAPH)
The Commonwealth Bank’s hybrid security CBAPH will be redeemed to cash on 26 April 2024. Clients who hold CBAPH should contact their adviser to discuss how to reinvest the proceeds if they have not already done so.
Jonathan Wood
P 0421 028 573
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