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In our opinion, the ASX200 delivered a stellar performance on Thursday considering the deteriorating interest rate backdrop both locally and overseas following strong economic data over the previous 24 hours:
- While the US CPI looked market friendly on the surface core prices which exclude food & energy rose to 5.6%, well above the Fed’s 2% inflation target hence markets ended Wednesday’s session factoring in a 67% chance of a +0.25% hike in May.
- Australia’s jobs report yesterday was stronger than expected with the unemployment rate remaining near a 50-year low of 3.5%.
Importantly bond yields hardly reacted to both sets of data suggesting they are already pricing in the potential for one more rate hike in May while cuts in late 2023, through 2024, are being factored into many financial models:
- We believe it’s 60-40 whether the Fed hikes next month whereas we’re sticking to our view that the RBA will keep local rates at 3.6% throughout 2023.
- Importantly while we believe aggressive rate hikes will soon become a thing of the past we don’t believe central banks will be as anxious to commence cutting rates as bond prices imply.
- Overnight the Bank of Canada left interest rates unchanged at 4.5% for the 2nd consecutive month believing inflation will continue to slow and the economy will enjoy a soft landing.
MM is neutral on both US and Australian short-dated bond yields over the coming months
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US 2-year v Australian 3-Year Bond Yields
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US 2-year v Australian 3-Year Bond Yields
The ASX200 ended down -0.3% yesterday with the strong employment print exerting a mildly negative influence across the market but with winners still beating losers on the day it was nothing overly concerning in our opinion i.e. the index was dragged slightly lower by falls in the market heavyweights CBA, BHP, and CSL. Considering the market’s ability to absorb “bad news” and the defensive positioning of both retail investors and fund managers we continue to see the path of least resistance/most pain being on the upside.
- Following the +1.3% rally by the S&P500 overnight the SPI Futures are looking for the ASX to regain yesterday’s losses with the resource names likely to be the main drag e.g. BHP Group (BHP) was down ~20c on the US.
MM remains neutral to bullish on the ASX200 above 7300
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The dust appears to have settled on the Banking Sector yet we still sense that subscribers are very concerned as to what comes next for the local names, a penchant for the banks by Australian retail investors is likely to be the major contributing factor to these worries. Hence this morning we’ve quickly updated our views on the 3 holdings in our Flagship Growth Portfolio.
- It’s important to remember that our Flagship growth Portfolio only holds 12% in the “Big 4” and 6% in Macquarie Group (MGQ) for a total of 18%.
- Hence we remain mildly underweight the banks which represent over 20% of the ASX200 from a weighting perspective.
Importantly we continue to believe the Australian Banks and the overall system are well positioned to deal with the recent pressures on the global bank sector with Australia’s relative sector outperformance in 2023 illustrating this perfectly.
