CPI to pressure rates

Global week in review: Oil pressures

US equities eased further last week, reflecting a widening of the Iran war and disappointing tech earnings results.

Source: Betashares, Bloomberg.

The Iran conflict sadly dragged on last week, lifting oil prices 8% and taking them up 28.5% on the month. Continued US bombing has done little to weaken Iran’s resolve; instead, it has upped the ante by having the Yemen-based Houthis attack oil facilities in Saudi Arabia. Iran is intent on pressuring global oil markets by blocking not only the Strait of Hormuz but also Saudi Arabia’s alternative Red Sea route. As the image below shows, the Bab-el-Mandeb Strait is another Red Sea choke point – at 30km, its narrowest point is even smaller than the Strait of Hormuz (35km).

Source: US Energy Information Administration (EIA)

Weekend reports suggest President Trump dropped plans for further intense bombing, amid concerns the US was running low on missile interceptors to protect its Middle East bases.

Although oil prices are up, equity markets remain remarkably becalmed – perhaps sensing Trump will again soon try to make a deal. That said, bond yields have moved higher on concerns the oil price rebound will force the Fed to raise rates later this year.

In other news, markets were less than enthusiastic over the first set of earnings reports from the US tech stars. Although Alphabet comfortably beat earnings expectations once again, its stock fell after it upgraded capital spending plans. Tesla’s stock also sank, reflecting weaker-than-expected earnings.

Last but not least, Trump saw fit to announce sweeping new tariffs of 10-12.5% on most trading partners to replace those ruled illegal by the Supreme Court. The flimsy legal pretext was that most countries (apart from the US!) had insufficient controls against imported goods made by forced labour. That said, a range of exemptions also applied in areas such as food and energy to limit the domestic inflation impact. Australia’s top three exports to the US – beef, gold and copper – will, for example, remain tariff-free.

Global week ahead: FOMC and inflation

Markets will continue to pay close attention to developments in Iran. The conflict is delicately poised: escalation, such as attacks on energy and water facilities, is a real risk, though renewed peace talks are also possible.

The Fed also meets this week, though markets confidently expect rates to remain on hold, especially after the lower-than-expected June CPI report. The post-meeting statement will likely talk tough on tackling inflation, even though the Fed seems in no hurry to put words into action.

Tech sector earnings and the AI outlook also remain in focus, with Microsoft, Meta and Apple all reporting. While earnings are likely to remain good, markets are no longer happy to hear about rising AI investment costs.

Key US economic data is also released, with a healthy 2.3% annualised gain in Q2 GDP expected, driven by continued strong growth in AI-related business investment. Following the good CPI result, the core personal consumption expenditures deflator (PCED) is expected to rise 0.2% in June, allowing the annual rate to ease a little from 3.4% to a (still high) 3.3%.

The Bank of Japan meets on Friday but is also expected to stay on hold. As in the US, markets expect the BOJ will likely raise rates again by year-end.

Global equity trends: Energy and financials

The main global trend remains an unwinding of global technology’s once strong relative performance as AI concerns mount.

Energy continues to benefit from the war in Iran, while financials are benefiting from rising bond yields (as higher rates tend to fatten bank interest margins).

*All but value factors. Local currency basis. Source: Betashares, Bloomberg

Australia week in review: Employment strength

Local stocks eased back further last week, not helped by a solid employment report that renewed worries about higher interest rates.

Source: Betashares, Bloomberg.

Last week’s June employment report revealed a further strong 76k employment gain. Rising labour force participation, however, kept the unemployment rate steady at 4.4%. All up, the result will do little to dissuade the RBA that the labour market remains tight.

In other news, depressed auction clearance rates suggest the post-Budget slump in residential property prices continues.

Local equity market trends: Energy & financials

Energy enjoyed another good week, as would be expected given the intensifying war in Iran. Technology, health care and consumer discretionary stocks however suffered price declines. In an otherwise bleak local outlook, investors seem to be seeking safety in financials, with technology and small caps again underperforming.

Source: Betashares, Bloomberg.

Australia week ahead: CPI “make or break” report

The major data highlight this week is Wednesday’s all-important June consumer price index report. For the RBA, the focus will be the quarterly trimmed mean. The market expects a 0.9% quarterly gain, which would see annual trimmed mean inflation edge up to 3.7% from 3.5% in the March quarter – or a slightly softer result than the annual 3.8% rate the RBA expected in the May Statement on Monetary Policy.

Energy prices have been better behaved than the RBA feared in May, although non-energy cost concerns have likely only intensified, with a still tight labour market and reports of rising wage and non-wage costs. What’s more, the renewed Iran conflict has since seen energy costs rebound.

To my mind, a 0.9% trimmed mean gain would leave the RBA’s August rates decision line ball. My expectation, however, is that the trimmed mean will be a little higher than expected at 1.0%, due to strength in market services and housing costs. Such an outcome, I suspect, would leave the RBA little choice but to raise rates next month.

Have a great week!