20 May 2022
“It is not the man who has too little, but the man who craves more, that is poor.”
–Seneca
Key Points
- Australian unemployment rate continues to fall
- Consumer confidence falling
- APRA Chair, Wayne Byres keeping close eye on rising credit risks to banking sector
- Fed Chairman reaffirmed market that the US Central Bank determined to fight inflation
- US company reporting showing margin pressures increasing
- China continues to struggle with COVID lockdowns
Australia
The Australian unemployment rate continues to fall and is now below 4% which of course doesn’t help the widespread skill shortages everyone is experiencing. This will of course generate higher wages and the RBA will continue to normalise interest rates and further increases are guaranteed. The skilled migration catch-up from the COVID lockdown can’t come quick enough, and who ever wins the election on Saturday, will have their hands full solving this issue – but there is no quick fix and higher interest rates by itself will not solve this problem.
With a slower economy and falling real estate prices also comes increased credit risk and the banking regulator APRA continues to have a close focus on bank home loan books and housing lending standards. In a recent speech, APRA Chair Wayne Byres, noted rising credit risks to the banking sector from higher inflation and interest rates, particularly as many households and businesses have not experienced inflationary pressures and materially higher interest rate increases before. As we have seen previously APRA has many tools to force the banking sector to slow down lending and as seen just recently during the pandemic, they can implement banks to cut dividend payments or force them to raise additional capital to strengthen balance sheets.
Global
During the week US Fed Chair J Powell reaffirmed the world that they are very likely to continue to raise rates and that they are determined to get inflation under control. (What a change in language form just a couple of months ago!) This was a further confirmation for the market and two 0.50% increases for the next two meetings are locked in and there is also still a possibility of a 0.75% with the Fed ready to do more. The Fed will hike rates to “neutral” this year which is considered to be around 2.5%.
This has reassured the bond market and we have seen yield curves flattening with the US 10year bonds recently peaking at 3.20%, falling back down to 2.85%. The same happened here in Australia with our 10year government bonds falling from 3.6% back down to 3.3% and the 5year yield peaking at 3.4% and currently trading at just over 3%.
US profit reporting season is starting to show signs of all these negative forces and margin pressures are getting reported everywhere and shares are sold off strongly. A couple of days ago Wall Mart, the biggest US retailer, signalled a hit to its margins which resulted in the biggest one-day price fall for Walmart’s shares since 1987. Walmart’s results are always a bellwether for the state of play for the US consumer. Of course, if one would have invested into Walmart’s bonds the volatility was very small during the week and coupon payments are not impacted!
In a historical move in Europe, Finland and Sweden announced plans to join NATO triggered by Russia’s war. Gathering in Berlin, most NATO foreign ministers embraced the enlargements however, not unexpectedly Turkey voiced some concern. Who would have ever thought that these two historically neutral countries would ever consider such a much – truly incredible!
Chinese retail and factory activity fell strongly in April as the COVID lockdown continues to disrupt supply chains, further putting inflationary pressure onto the global economy. However, during the week, there was some hope emerging that we may have seen the peak of the pandemic with some better news from Shanghai. All our thoughts are with the people and one can only hope for better times.
All this of course again highlights the value we can offer to our clients when we deliver reliable income streams yielding 4.5%-6% despite all the noise, uncertainty, and volatility we currently experience worldwide.
Contact us if you have any questions or would like any assistance.
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