Investment Market Update: 5 February
Financial markets enjoyed another solid week as the US S&P500 Index reached an all time high on the back of stronger than expected nonfarm payroll numbers (act 353k v’s f’cst 185k). The strong payroll numbers continue to highlight the underlying strength of the US economy. With the Fed effectively now on pause until it starts to look at reducing cash rates through the 2h24, the ability for the market to move higher in the near term remains. However, with broad equity valuations in the US at the upper end of our fair value range, we expect that future positive moves are likely to be more balanced with better upside in the small/mid cap part of the market. Nevertheless, the ‘soft landing’ scenario for the US does look achievable given the recent data and this will be broadly positive for growth assets. In Aust, the decline in the inflation rate (to 4.3% y/y, -0.9% pcp) will see the RBA remain on hold when it meets this week (6th). We are now of the view that the RBA is done, with the next move down in the 2h24. The fall in the inflation rate was most pronounced in food (-1.3%), clothing & footwear (-2.0%), transport (-1.9%), and recreation (-5.1%). Housing costs (-0.9%) also fell, although rental inflation (-0.3%) still remains at 7.3% (4q23), which is 3.3% higher from 4q22. Household electricity/fuel bills were also 13.4% higher over the 4q23. So despite the positive number, pressure on domestic households remain and with inflation still well above the RBA’s target level, there is no likelihood of a near term rate cut. In China, the focus will be on both the PPI (f’cst -2.6%) and CPI (-0.5%) releases this week. After the collapse of the Evergrande Property Group, the ongoing deflation across the Chinese economy is adding to pressure on the Chinese Government and PBOC for greater economic stimulus. In the near term, we remain cautious on the outlook for the Chinese economy and equity market. In the UK, the release of PMI data is f’cst to show that the economy is improving with both the Services PMI (f’cst +53.8pts) and Composite PMI (+52.5pts) indices higher, while in Europe, the ongoing decline in the PPI (f’cst -10.5% y/y) will further reinforce a lower inflationary outlook with expectations the ECB will follow the Fed and begin reducing cash rates through the northern summer.
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