Investors start pricing in recession

Blog
Friday 17th June 2022

Investors start pricing in recession

Blog
Friday 17th June 2022
Written by Chris Lioutas

Markets:

  • Local and global equity markets fell this week as central banks got aggressive increasing the risks of recession.
  • In local stock news, ResMed agreed to acquire German healthcare software company Medifox Dan for US$1 billion, with the company planning to integrate their out-of-hospital software solutions into its software-as-a-service offering.
  • BHP abandoned plans to sells its Mt Arthur coalmine in NSW’s Hunter Valley after failing to receive a viable offer. Instead, BHP said it would operate the 2,000 worker mine until 2030 and then close it.
  • The International Energy Agency said it expects demand to rise further in 2023, growing by more than 2%.

Economics:

  • CBA now expects the Australian economy to grow at 3.5% this year, down from a previous 4.7%, and then slow to 2.1% growth in 2023 compared with the 3.1% growth previously expected. They also expect the RBA will need to cut rates in the 2nd half of 2023, as inflation falls quickly, unemployment rises, and house prices fall sharply. CBA now expects the cash rate will reach 2.1% by year end.
  • Australia’s Fair Work Commission announced a lift in the minimum wage of 5.2% from 1 July 2022. Modern award wages will also rise with a 4.6% increase awarded. Both will add further pressure on the RBA to raise rates. Good for those workers, but terrible news for small business already straining under higher costs and labour shortages. The CBA now expects wages growth to accelerate to 3.25% in early 2023.
  • Australian consumer sentiment fell again, down 4.5% in June and now at its lowest level since February 2009. Business confidence and conditions also fell, but both remain above their long-term averages.
  • Australian employment rose strongly by 60,600 in May driven again by full-time employment, whilst the unemployment rate stayed at 3.9% due to a large lift in the participation rate. Part-time employment fell by 8,700.
  • The US inflation rate unexpectedly accelerated to 8.6% in May, the highest since December 1981. Soaring energy prices doing most of the damage, with rising food prices doing their bit. The annualised pace of core inflation did slow for a 2nd month but was still up 0.6% on the previous month.
  • The US central bank got spooked by the inflation print and increased rates by 0.75% at their June meeting, above expectations for a 0.50% rise. It now looks likely that another 0.75% increase is on the cards next month, which would get them to a 2.5% rate leading into September. The bank also reiterated the path to reduce the size of their balance sheet (quantitative tightening).
  • The European central bank outlined a plan to buy more bonds (ie. more money printing) of weaker Eurozone governments under an existing bond-purchase program as government bond yields in the periphery soar, with Italian 10yr yields approaching 4% and Greek 10yr yields well over 4%.
  • UK economic growth fell by 0.3% in April after a decline of 0.1% in March. Services fell by 0.3% in the month, production fell by 0.6%, and construction fell by 0.4%. The first time all 3 components have fallen since January 2021.
  • The Bank of England raised rates by 0.25% to 1.25% at its June meeting, a 5th consecutive rate hike, pushing borrowing costs to the highest in 13 years as the bank tries to temper soaring inflation. There were calls by some members for a larger hike. The bank now expects inflation to be over 9% in the next few months and rise above 11% by October.
  • German consumer prices rose in May, up 0.9% from the 0.8% rise in April. The German central bank now expects inflation to rise 7.1% in 2022 and 4.5% in 2023. The problem is German economic growth expectations have fallen sharply to 1.9% this year.
  • The Swiss National Bank hiked its policy rate by 0.50% to minus 0.25% at its June meeting, surprising markets with its first rate hike since 2007.
  • The Bank of Japan maintained its loose monetary settings, with dovish policy guidance, committing to keep borrowing costs at present or lower levels to support the economy’s recovery efforts.
  • A range of economic data appears to show that supply issues globally are starting to abate somewhat. Figures last week showed Chinese exports to the rest of the world surged in May.
  • Mixed data out of China with headline industrial output growing unexpectedly by 0.7% from a year earlier, but electricity output was down 3.3% and power consumption was down 1.3% for the same period.

Politics:

  • The European Union’s executive arm looks to be laying the groundwork for Ukraine to be granted candidate status to the union. However, the recommendation would come with conditions linked to the rule of law and anti-corruption legislation, which would be tough given the country’s abysmal track record in both areas.
  • Hopes for reopening in China are also faltering with a brief lockdown in Shanghai for mass covid testing as cases rise.
  • The US announced new sanctions on Iran, putting upward pressure on the oil price, as Washington decided to impose sanctions on Chinese, Emirati, and Iranian firms that help export Iran’s oil.

Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concern