Markets were mixed over May with the ASX 200 falling -2.5 % and the MSCI in $AU increasing by 1.1%.
With the debt ceiling issue out of the way, global and Australian shares continue to look vulnerable over the next few months. Share market gains since the lows last year have been narrowly based with the US share market flat this year were it not for a handful of tech stocks. Banking stress is continuing in fits and starts in the US resulting in additional monetary tightening. Leading economic indicators continue to point to a high risk of recession in the US and Australia. Fiscal austerity as part of the debt ceiling deal and the withdrawal of the liquidity injection by the US Treasury adds to this risk. China’s recovery is looking less robust. The weakness in copper, oil and other industrial commodities suggests weakening demand. Central banks are probably close to the top but risk doing more and the period from May to September is often rough for shares. We remain of the view that shares will do okay on a 12-month view as central banks ease up as inflation cools, but the next few months are likely to be rough.
A rebound in Australian inflation and the latest minimum and award wage increases unfortunately now make a further RBA rate hike look likely after an increase of 0.25 on Tuesday. The cash rate is now 4.1%. So, following the April inflation data and the further step in minimum and award wages growth, the risk is now very high that ongoing inflation and wages concerns will see the RBA overtighten and knock the economy off the “narrow path” - between tightening too little and tightening too much that Governor Lowe has been referring to - into recession.
US economic data over the past week was mixed. Payrolls rose a far stronger than expected 339,000 in May but household employment fell by 310,000 with falls in self-employment suggesting that while firm level employment as captured in payrolls remains strong self-employment may be weakening. Meanwhile unemployment rose to 3.7% and growth in average hourly earnings slowed to 4.3%yoy. Consumer confidence fell slightly in May, manufacturing conditions in the ISM survey and in the Dallas and Chicago regions were weak and home prices rose in March. Meanwhile, Fed Vice Chair designate Jefferson signalled that the Fed is not planning to raise rates in June but that a pause would not necessarily mean that it has reached the top. The mixed jobs data seen in the last week probably doesn’t change this with markets pricing in just a 12% chance of a 0.25% rate hike in June but a 64% chance of a hike in July.
Chinese May business conditions PMIs were mostly soft with weak manufacturing conditions (with the official manufacturing PMI showing a fall but the Caixin PMI up). Overall, this adds to concerns that the Chinese recovery is weaker than expected particularly in manufacturing which in turn partly explains the ongoing weakness in industrial commodity prices.
The next 12 months are likely to see easing inflation pressures and central banks moving to get off the brakes. This along with improved valuations should make for reasonable share market returns. But the next few months are likely to be rough given high recession and earnings risks, uncertainty around US banks and poor seasonality out to around September/October. This is likely to impact both global and Australian shares.
Bonds are likely to provide returns above running yields, as growth and inflation slow and central banks become less hawkish.
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
Source: AMP Capital, Pendal Group, AZ Sestante
