Investment markets & key developments

August 8th 2022

market update AMP header 8-5
key inv 1
Source: Bloomberg, FXStreet, AMP


Investment markets & key developments

The rebound in share markets continued over the last week, helped by good earnings data and relief that increased China/US tensions resulting from US House Speaker Nancy Pelosi’s visit to Taiwan did not spill over into a more serious conflict (at least not yet). Despite a slight setback on Friday, as strong US payrolls data were seen as keeping the US Federal Reserve (Fed) hawkish for now, for the week US shares rose 0.4%, Eurozone shares rose 0.3% and Japanese shares gained 1.4%. Chinese shares were the exception and fell 0.3%. The positive global lead, along with signs of slightly diminished hawkishness from the Reserve Bank of Australia (RBA), pushed the Australian share market up 1% for the week. Bond yields reversed some of their recent falls for the week, mostly after the strong US jobs data. Oil and metal prices fell, but iron ore rose. The $A fell as the $US rose.

We remain of the view that shares are vulnerable to a pull back over the next few months as central banks are a way off actually cutting rates, recession risk is still rising (and this runs the risk of significant earnings downgrades) and geopolitical risk is still on the rise, as highlighted by China/US tensions in the last week and the upcoming November US mid-terms. However, the continuing strength of the rebound (with the direction setting US share market up 13% from its low) raises the possibility that we may have seen the bear market low and any pull back may just be a partial retracement of the rally since mid-June. Time will tell. Either way, on a 12-month horizon we remain optimistic on shares as inflation recedes, central banks become less hawkish and a deep recession is likely to be avoided.

First the bad news – which drives the risk of another pull back:


key inv 2



key inv 3



key inv 4
Source: Bloomberg, AMP


But there is also good news supporting the view we may have seen the low; or even if not, shares will be up on a 12-month view.


key inv 5
The Inflation Pipeline Indicator is based on commodity prices, shipping rates and PMI price components. Source: Bloomberg, AMP


Turning specifically to the RBA, which raised rates again by another 0.5%, the message from its post meeting statement and its quarterly Statement on Monetary Policy is that it remains hawkish, but it is starting to leave a bit of wiggle room. Given its upwards revision to its inflation forecast for this year to 7.75%yoy and the very tight labour market, it rightly remains focussed on slowing demand and keeping inflation expectations down and so is still flagging more rate hikes ahead. But its reference to wanting to keep the economy on an “even keel”, its downwards revisions to growth (to a very pedestrian 1.75% for the next of years), its forecast of a rise in unemployment from 2024, its acknowledgement of falling consumer confidence, its recognition of negative wealth effects from falling home prices, its stronger recognition that some households are not well placed to withstand rate hikes and its reiteration that its “not on a pre-set path” all suggest that its open to an easing in the pace of rate hikes in the months ahead as its tightening starts to get traction. This is broadly consistent with our assessment that cash rate hikes will slow in the months ahead, with some months seeing no moves ahead of a peak in the cash rate at 2.6% either later this year or early next, and that rates will start to fall in the second half of next year.

The Carpenters’ Burt Bacharach/Hal David medley. Dionne Warwick I reckon was the best interpreter of Bacharach/David songs but Andy Williams velvet voice was a natural fit. As were The Carpenters. Their first big hit was a reworked version of the Bacharach/David song “Close to You”, but before that Burt Bacharach asked them to record a medley of his and Hal David’s songs at a charity dinner. The resulting medley 1970 is amazing. I just love Karen’s voice and Richard’s arrangements of these songs. This version of the medley 1972 in Australia from two years later is even better partly because it begins with a fantastic version of “Any Day Now”. Karen makes it all look so easy! I only wish she had stayed with the drums rather than moving out front.


Coronavirus update

New global COVID cases are down from their recent high – with Europe and South America down, the US stable but Asia (notably Japan, South Korea and Indonesia) up. New cases in China are remaining low.


key inv 6
Source:, AMP


Australia has seen new cases and hospitalisations roll over again. Although new daily deaths with COVID spiked above their high from earlier this year, this was partly due to the processing of a backlog of deaths in Victoria; and at least they remain about 90% lower than where they would have likely been based on the pre-Omicron and pre-vaccine period.


key inv 7
Source:, AMP


Economic activity trackers

Our Australian Economic Activity Tracker fell slightly in the last week continuing the loss of momentum seen since April consistent with a slowdown in growth. Our US Tracker rose slightly and our European Tracker fell slightly.


key inv 8
Based on weekly data for eg job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP


Major global economic events and implications

US data was mixed. The July services conditions ISM surprisingly rose to a solid 56.7 and jobs data was strong, with payrolls up more than expected, unemployment down to a new low of 3.5% and wages growth accelerating. But against this the manufacturing ISM and construction spending fell. And forward-looking labour market indicators are continuing to soften, with job openings and quits falling (albeit from still high levels) and jobless claims continuing to trend up. The ISM survey showed a further fall in supplier deliveries, order backlogs and output prices, all pointing to easing inflation.

87% of US S&P 500 companies have now reported June quarter earnings, with 75% ahead of expectations and earnings growth expectations for the quarter, rising from 5%yoy at the start of the reporting season to now 9.2%, and on track for 10%. This is far stronger than expected. Outlook comments have been mixed, reflecting uncertainty regarding the growth outlook, but have not been overwhelmingly negative. Earnings growth outside the US has remained stronger, at around 16%yoy.


key inv 9


The Democrats’ downsized build back better budget reconciliation legislation – called the Inflation Reduction Act – is close to passage through Congress. The main elements are a 15% minimum corporate tax rate, a 1% tax on share buybacks, lower drug prices and clean energy subsidies. It’s unlikely to have much macro impact though (as it’s a tiny fraction of the size of the original $3.5trn plan), it won’t really reduce inflation much (by no more than 0.1% pa) and will only start reducing the budget deficit from around 2027. Rough estimates are that it will amount to a 3% corporate tax rate increase.

Eurozone producer prices were up a record 36%yoy in June, with energy prices up 93%yoy. German baseload electricity prices are now up 8-fold from where they were at the start of last year. All of which highlights the very high risk of recession in Europe and ongoing inflation pressures there.

Japanese June household spending growth moved up and cash wages growth continues to trend up, but it’s only around 2%yoy.

Chinese manufacturing conditions PMIs slipped back in July, but services PMIs held on to their gains from reopening.


key inv 10


Australian economic events and implications

Australian economic data was mixed. On the positive side real retail sales rose strongly in the June quarter, car sales bounced back strongly in July and the trade surplus rose to a new record high of $17.7bn. Net exports are expected to contribute around 1 percentage point to June quarter GDP growth and the strong rise in real retail sales augurs well for June quarter consumption growth. Of course, monthly retail sales data is now slowing and rising interest rates and poor consumer confidence points to a slowdown ahead.


key inv 11


Against this though, ANZ job ads remained high, but fell in July and may be starting to slow and housing-related data was soft. Building approvals fell less than expected but the trend is clearly down, which, even allowing for a large pipeline of work yet to be done, points to slowing home building activity ahead. Housing finance fell by more than expected – and now looks to be clearly rolling over. More falls are likely ahead, as mortgage rate hikes and falling property prices impact. And CoreLogic data for July confirmed that the decline in home prices is accelerating, led by Sydney.

So far, the decline in national average home prices is just 2%, which is just a flick off the top, but the pace of decline is comparable to what was seen going into the Global Financial Crisis (GFC), the run-up to the early 1990s recession and in the early 1980s recession. But all of those slumps followed long periods or rate hikes with interest rates at their peaks and about to start falling, whereas this time around we are only four months into interest rate hikes, with more rate hikes still to come. The rapidity of the decline in home prices this time around so early in an RBA tightening cycle reflects the de facto tightening that started with rising fixed mortgage rates a year ago. but more importantly. the heightened sensitivity to rising interest rates flowing from much higher debt levels now and very poor consumer confidence.


key inv 12
Source: CoreLogic, AMP


Meanwhile, the Melbourne Institute’s Inflation Gauge rose 1.2% in July, or by 5.4%yoy. While it’s undershooting the upswing in the CPI, it’s consistent with more upside in CPI inflation.


What to watch over the next week?

In the US, the focus will be on July CPI data (Wednesday) which is expected to show a fall in headline inflation to 8.8%yoy (from 9.1%) helped by lower gasoline prices, but a rise in core inflation to 6.1%yoy (from 5.9%). Small business optimism for July (Tuesday) is likely to show a further fall.

Chinese inflation data (Wednesday) is expected to show a rise in CPI inflation to 2.8%yoy, but a fall in producer price inflation to 4.9%yoy. Credit data will also be released.

In Australia, the NAB business survey and the Westpac/MI consumer survey (both Tuesday) are likely to show further falls in business and consumer confidence.

The June half Australian earnings reporting season will ramp up, with around 17 major companies due to report covering 18% of the market cap including Suncorp (Monday), Computershare and CBA (Wednesday), Mirvac, AMP, QBE and Telstra (Thursday) and Resmed & IAG (Friday). Consensus expectations are for around 20% earnings growth for the 2021-22 financial year, but with this is boosted by energy earnings (+275%) and industrials averaging around 9.5% growth. The focus will likely be on outlooks given cost pressures, labour shortages and slowing consumer demand.


Outlook for investment markets

Shares remain at high risk of a pullback in the months ahead as central banks continue to tighten to combat high inflation, the war in Ukraine continues and uncertainty about recession remains high. However, we see shares providing reasonable returns on a 12-month horizon as valuations have improved, global growth ultimately picks up again and inflationary pressures ease through next year allowing central banks to ease up on the monetary policy brakes.

With bond yields looking like they have peaked, for now, short-term bond returns should improve.

Unlisted commercial property may see some weakness in retail and office returns (as online retail activity remains well above pre-COVID levels and office occupancy remains well below). Unlisted infrastructure is expected to see solid returns.

Australian home prices are expected to fall 15 to 20% into the second half of next year, as poor affordability and rising mortgage rates impact.

Cash and bank deposit returns remain low but are improving as RBA cash rate increases flow through.

The $A is likely to remain volatile in the short term as global uncertainties persist. However, a rising trend in the $A is likely over the medium-term as commodity prices ultimately remain in a super cycle bull market.


If you have any questions about this please get in touch with us.

[ninja_form id=41]

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes 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. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.