U.S. equities declined on Thursday, although pared larger losses after real consumer spending was lower than forecast, while core inflationary pressures eased.
The S&P500 declined -0.88% paring losses of as much as -2% weighed by technology -1.33% and consumer discretionary -1.54% while utilities outperformed +1.10%. The Dow Jones was also -0.82% lower along with the Nasdaq Composite -1.33% and Russell 2000 -0.66% with the VIX rising +1.88% to 28.69. The rout over the first six months of the year is the worst since 1970 although Wall Street analysts remain optimistic about earnings growth this year yet to revise down their forecasts which Goldman Sachs and Morgan Stanley analysts expect estimates to be revised lower for this quarter. Meanwhile, Jonathan Golub of Credit Suisse suggests the potential for double-digit returns between now and the remainder of the year, suggesting there isn’t as much of a profit problem as people say. In comparison to the 1970 sell-off, equities fell -21% during the first half of the year, only to rally +27% over the remaining six months.
Consumer spending adjusted for inflation was modestly lower than forecast decreasing -0.4% in May compared to estimates of a -0.3% decline suggesting the economy is on a somewhat weaker footing than previously thought. Core PCE inflation for the 12 months to May was lower than anticipated, rising at +4.7% compared to +4.9% in April, modestly below analyst estimates of +4.8%. Meanwhile, headline prices were unchanged at +6.3% compared to forecasts of a rise to +6.4%. Treasury yields were lower across the board with the 2-year rate down -8.5 basis points to 2.953% along with both the 10 and 30-year rates by -7.6 and -3.6 basis points respectively, with the 10-year yield flirting with the 3% level after recently peaking at +3.5%. Meanwhile, the 5–10-year yield curve has inverted to -2.3 basis points, highlighting concerns over economic growth and the potential for lower rates in the coming years following the Fed’s aggressive tightening.
European shares posted their worst half-year since 2008 declining -17% year to date marked by volatility as inflation soared with central banks shifting to a hawkish footing as well as Russia’s invasion of Ukraine. The Euro Stoxx 600 declined -1.5% along with the DAX -1.69%, CAC -1.80% and FTSE100 -1.96% with benchmarks broadly lower across the region. In economic data, Germany’s unemployment soared by +133k for the month of June compared with estimates for a -6k decline with the unemployment rate climbing to +5.3% against estimates to remain unchanged at +5% although the numbers were skewed by Ukrainian refugees searching for work. Meanwhile the unemployment rate across the Eurozone declined to +6.6% from +6.7% previously, below estimates of a rise to +6.8%. Eurozone inflation for the 12 months to June is released tonight, forecast to show a rise to +8.4% from +8.1% in headline prices, with core prices expected to edge higher to +3.9% from +3.8% previously.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is expected to rise modestly this morning with ASX200 futures up +18 points or +0.22% to 6,479. Shares finished -1.97% lower on Thursday with all sectors negative led by utilities -2.92% and materials -2.85% in what appeared to be a combination of tracking U.S. futures lower and potential tax-loss harvesting. For the financial year to June 30th the index lost -10.2%, only the third time in the past decade that investors have incurred a negative return. The ANZ measure of business confidence for the month of June declined to -62.6 from -55.6 in May as rising interest rates and concerns over economic growth weighed on sentiment. The Australian dollar rose +0.35% on Thursday to 0.6904 while the 10-year bond yield declined -3.4 basis points to 3.66% ahead of manufacturing PMI and building permit data out at 09:00 and 08:45 AEDT this morning.
Oil prices retreated overnight with both WTI and Brent crude -3.48% and -2.85% lower at US$105.94 and US$109.25 a barrel. The move lower comes after OPEC+ completed the return of output it halted during the pandemic, although so far members have consistently failed to meet production increases. President Biden will also travel to the Persian Gulf region next month in order to push allies to boost production. Iron ore futures in Singapore declined -2.56% on Thursday and are a further -3.08% lower this morning at US$115.30. Gold declined -0.56% overnight to US$1,807.46 an oz, along with silver -2.20% to US$20.29 and Bitcoin slumped -7.13% to US$18,758.
Economic data:
- Australian Manufacturing PMI (MoM Jun) 09:00
- German PMI (MoM Jun) 17:55
- Eurozone PMI (MoM Jun) 18:00
- Eurozone Inflation (YoY Jun) 19:00
- U.S. PMI (MoM Jun) 00:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
