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Week Ahead – Central banks

Rate hikes expected as inflation keeps rising It’s been another volatile week in financial markets with events in and around Ukraine continuing to dominate….

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Rate hikes expected as inflation keeps rising

It’s been another volatile week in financial markets with events in and around Ukraine continuing to dominate. Sentiment is still very headline-driven and an enormous amount of uncertainty remains around the outcome of talks between Ukraine and Russia and the sanctions being imposed on the latter by the West.

This in turn creates huge uncertainty around the global economic outlook, with soaring commodity prices a massive downside risk for growth and upside risk for inflation. Central banks were already between a rock and a hard place prior to the invasion as they sought to control inflation without negatively impacting the recovery from the pandemic. Soon they may be forced to choose between inflation and recession.

The ECB opted to proceed as planned and announced a tapering of asset purchases which could lay the groundwork for rate hikes later this year or next. The Fed and BoE are expected to do the same with rate hikes from both expected next week. The CBRT is expected to leave rates unchanged again, while the CBR is far more unclear after opting to more than double its key rate to 20% in response to Western sanctions a couple of weeks ago.

Multiple hikes needed as US inflation soars

How many more hikes can we expect from the BoE?

What next from CBR as Ukraine invasion continues?

US

The Fed is expected to finally start fighting inflation by ending QE and delivering a quarter-point rate hike next week. Given the impact of the war in Ukraine, expectations are high that inflation will continue to heat up over the next couple of months and that should keep the pressure on the Fed to raise rates. 

Investors will pay close attention to the February retail sales report that should show the consumer is still handling the current price surges.    

EU 

Russian forces are intensifying their attacks on Ukraine even as negotiations continue between the two countries and Putin reports that progress is being made. The invasion remains the greatest risk to the economic outlook for the region, as the ECB alluded to this week. 

It will start tapering its asset purchases though in order to get to grips with record levels of inflation. Markets are still pricing in 30-40 basis points of hikes this year. We’ll get an inflation update on that next week as the final HICP data is released on Thursday. 

UK

The Bank of England is widely expected to raise interest rates again on Thursday – the third consecutive 25 basis point increase – and will probably pave the way for at least one more at the following meeting. The risks to the outlook are clearly tilted to the downside but inflationary pressures are strong and the central bank is determined to get to grips with domestic forces before it’s too late.

Labour market data will also be released on Tuesday, with the earnings component probably the most important aspect given the central banks’ concerns about domestically generated inflation.

Russia

The CBR raised interest rates to 20% a couple of weeks ago, up from 9.5%, in response to the severe sanctions imposed by the West. Since then, the currency has continued to struggle and isn’t too far from its lows. The sanctions keep coming for Russia and the central bank may be left with little choice but to raise rates again, either next week or at any point in between meetings depending on how the situation evolves. 

Putin has indicated that talks are moving in the right direction but attacks are being intensified so we can take his words with a pinch of salt.

South Africa

The rand has recovered some of its declines over recent days in line with reversals in risk appetite. It remains vulnerable to sharp dips again though, with events in and around Ukraine remaining a dominant force for the currency. Unemployment and retail sales data in focus next week.

Turkey

The lira has been sensitive to risk appetite in the markets in recent weeks, with soaring commodity prices against the backdrop of already sky-high inflation naturally a major concern. It’s trading at its lowest level since mid-December against the dollar.

Next week the central bank decision will be the highlight. The CBRT obviously won’t reverse course and the direction of travel next will ultimately depend on its monetary policy review. Rates are expected to remain at 14% this month. 

China

Chinese equities are under pressure as US-listed ADRs fall dramatically on US delisting fears and more regulatory headwinds at home. Complicating the picture is the huge jump in commodity and energy prices with the government urging state-owned refiners to halt April exports to preserve domestic supplies. With risk sentiment also challenged because of Ukraine, slowing economic activity, and a slow property market, Chinese equities remain vulnerable to further sell-off.

USD/CNY has remained anchored around 6.33 with authorities seemingly happy with yuan strength, perhaps with one eye on China’s soaring import bills.

China releases fixed asset investment, retail sales, and industrial production on Tuesday with soft data lifting negativity around a Chinese slowdown once again. 

Watch also China’s Covid-19 caseload which has crept up to 1,000 cases a day. More big lockdowns could be on the way as it maintains Covid-zero.

India

India’s inflation rate due Monday has upside risks, and Tuesday’s balance of trade has downside risks as the Ukraine-induced turmoil in commodity markets threatens India’s recovery. 

With Chinese equities sagging, it appears that the hot money has rotated into Indian equities once again, supporting both the stock and currency markets this past week.

The short-term market direction will be dominated by headlines from the Russia-Ukraine conflict.

Australia 

The Australian dollar has held most of its gains recently, despite choppy trading, thanks to the huge jump in commodity prices. Sentiment flows have taken a back seat to the lucky country’s natural resources. Australia releases employment data on Thursday which is always good for some intraday volatility for AUD.

Apart from resources, equities remain at the mercy of the ebb and flow of Eastern Europe headlines.

New Zealand

New Zealand releases Q4 GDP and current account this week, but both are old news in the context of market developments.

NZD has, like AUD, endured choppy trading but is maintaining its gains as a commodity currency, albeit only agricultural ones. It remains more vulnerable than AUD to sentiment swings as a result.

Japan

Japan releases the Reuters Tankan, machinery orders, and inflation this week, but none will materially impact markets, with BOJ officials signalling that the conditions in the economy are not yet at the point where monetary stimulus can be reduced. That leaves USD/JPY at the mercy of the US/Japan rate differential which has widened sharply in the past week, pushing USD/JPY above 116.00. We expect that to continue in the week ahead. 

Japanese equities, dominated by fast money retail flows, have had an ugly week, coat-tailing the direction of US markets almost exactly. They remain entirely at the mercy of sentiment swings, although fears of an import price recession would temper any gains anyway.


Economic Calendar

Monday, March 14

Economic Data/Events

India CPI

France trade

Russia trade

New Zealand home sales, net migration

India wholesale prices

BP’s annual energy outlook

Tuesday, March 15

Economic Data/Events

China industrial production, liquidity operations

Poland CPI

France CPI

Eurozone industrial production

India trade data

UK unemployment Rate

South Africa unemployment rate

Canada existing home sales, housing starts

New Zealand performance services index

Australia consumer confidence, house price index

China property investment, retail sales YTD, surveyed jobless

Germany ZEW survey expectations

Mexico international reserves

U.S. cross-border investment, empire manufacturing, PPI

Wednesday, March 16

Economic Data/Events

FOMC Decision: Expected to raise interest rates by 25bps

US Retail Sales, business inventories

Release of RBA minutes

Canada CPI

UK Chancellor Sunak takes questions from MPs

Italy CPI

South Africa retail sales

New Zealand BoP

Australia leading index

China new home prices

Extraordinary meeting of NATO defence ministers

UK Treasury updates forecasts for the economy

Japan capacity utilisation, industrial production, trade, department store sales

EIA crude oil inventory Report

Thursday, March 17

Economic Data/Events

US housing starts, initial jobless claims, industrial production

Eurozone CPI

BOE Rate Decision: Expected to raise rates by 25bps to 0.75%

Turkey Central Bank (CBRT) Rate Decision: Expected to keep rates steady at 14.00%

Eurozone new car registrations

Australia unemployment

New Zealand GDP

Singapore electronic exports, non-oil domestic exports

Japan machinery orders, Bloomberg economic survey

Spain trade

ECB President Lagarde, Executive Board member Schnabel, Governing Council member Visco and Chief Economist Lane speak at Goethe University’s “ECB and Its Watchers” conference in Frankfurt.

Friday, March 18

Economic Data/Events

BOJ rate decision: Expected to keep policy unchanged

Russian Central Bank (CBR) is scheduled to meet: Expected to keep rates steady

US Conference Board leading index, existing home sales

Fed’s Barkin speaks at the Maryland Bankers Association First Friday Economic Outlook Forum

UK PM Johnson speaks at Conservative Party’s two-day spring conference

The US National Weather Service issues its spring flood assessment

Italy Trade

Canada retail sales

Japan tertiary index, CPI

Thailand forward contracts, foreign reserves, car sales

Sovereign Rating Updates

– Belgium (Fitch)

– Belgium (S&P)

– Spain (S&P)

– European Union (Moody’s)

– Greece (Moody’s)

– Greece, (DBRS)

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Economics

After a near 10% rally this week can the Netflix share price make a comeback?

The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to…

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The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to introduce a new ad-supported, cheaper subscription. The company also announced it is to lay off another 300 employees, around 4% of its global workforce, in addition to the 150 redundancies last month.

Netflix has been forced into a period of belt-tightening after announcing a 200,000 subscriber-strong net loss over the first quarter of 2022. The U.S. tech giant also ominously forecast expectations for the loss of a further 2 million subscribers over the current quarter that will conclude at the end of this month.

netflix inc

The company has faced increasing sector competition with Paramount+ its latest new rival, joining Amazon Prime, Disney+, HBO Max and a handful of other new streaming platforms jostling for market share. A more competitive environment has combined with a hangover from the subscriber boom Netflix benefitted from over the Covid-19 pandemic and spiralling cost of living crisis.

Despite the strong gains of the past week, Netflix’s share price is still down over 68% for 2022 and 64% in the last 12 months. Stock markets have generally suffered this year with investors switching into risk-off mode in the face of spiralling inflation, rising interest rates, fears of a recession and the geopolitical crisis triggered by Russia’s invasion of Ukraine.

Growth stocks like Netflix whose high valuations were heavily reliant on the value of future revenues have been hit hardest. No recognised member of Wall Street’s Big Tech cabal has escaped punishment this year with even the hugely profitable Apple, Microsoft, Alphabet and Amazon all seeing their valuations slide by between around 20% and 30%.

But all of those other tech companies have diversified revenue streams, bank profits which dwarf those of Netflix and are sitting on huge cash piles. The more narrowly focused Meta Platforms (Facebook, WhatsApp and Instagram) which still relies exclusively on ad revenue generated from online advertising on its social media platforms, has also been hit harder, losing half of its value this year.

But among Wall Street’s established, profitable Big Tech stocks, Netflix has suffered the steepest fall in its valuation. But it is still profitable, even if it has taken on significant debt investing in its original content catalogue. And it is still the international market leader by a distance in a growing content streaming market.

justwatch

Source: JustWatch

Even if the competition is hotting up, Netflix still offers subscribers by far the biggest and most diversified catalogue of film and television content available on the market. And the overall value of the video content streaming market is also expected to keep growing strongly for the next several years. Even if annual growth is forecast to drop into the high single figures in future years.

revenue growth

Source: Statista

In that context, there are numerous analysts to have been left with the feeling that while the Netflix share price may well have been over-inflated during the pandemic and due a correction, it has been over-sold. Which could make the stock attractive at its current price of $190.85, compared to the record high of $690.31 reached as recently as October last year.

What’s next for the Netflix share price?

As a company, Netflix is faced with a transition period over the next few years. For the past decade, it has been a high growth company with investors focused on subscriber numbers. The recent dip notwithstanding, it has done exceedingly well on that score, attracting around 220 million paying customers globally.

Netflix established its market-leading position by investing heavily in its content catalogue, first by buying up the rights to popular television shows and films and then pouring hundreds of millions into exclusive content. That investment was necessary to establish a market leading position against its historical rivals Amazon Prime, which benefits from the deeper pockets of its parent company, and Hulu in the USA.

Netflix’s investment in its own exclusive content catalogue also helped compensate for the loss of popular shows like The Office, The Simpsons and Friends. When deals for the rights to these shows and many hit films have ended over the past few years their owners have chosen not to resell them to Netflix. Mainly because they planned or had already launched rival streaming services like Disney+ (The Simpsons) and HBO Max (The Office and Friends).

Netflix will continue to show third party content it acquires the rights to. But with the bulk of the most popular legacy television and film shows now available exclusively on competitor platforms launched by or otherwise associated with rights holders, it will rely ever more heavily on its own exclusive content.

That means continued investment, the expected budget for this year is $17 billion, which will put a strain on profitability. But most analysts expect the company to continue to be a major player in the video streaming sector.

Its strategy to invest in localised content produced specifically for international markets has proven a good one. It has strengthened its offering on big international markets like Japan, South Korea, India and Brazil compared to rivals that exclusively offer English-language content produced with an American audience in mind.

The approach has also produced some of Netflix’s biggest hits across international audiences, like the South Korean dystopian thriller Squid Games and the film Parasite, another Korean production that won the 2020 Academy Award for best picture – the first ever ‘made for streaming’ movie to do so.

Netflix is also, like many of its streaming platform rivals, making a push into sport. It has just lost out to Disney-owned ESPN, the current rights holder, in a bid to acquire the F1 rights for the USA. But having made one big move for prestigious sports rights, even if it ultimately failed, it signals a shift in strategy for a company that hasn’t previously shown an interest in competing for sports audiences.

Over the next year or so, Netflix’s share price is likely to be most influenced by the success of its launch of the planned lower-cost ad-supported subscription. It’s a big call that reverses the trend of the last decade away from linear television programming supported by ad revenue in its pursuit of new growth.

It will take Netflix at least a year or two to roll out a new ad-supported platform globally and in the meanwhile, especially if its forecast of losing another 2 million subscribers this quarter turns out to be accurate, the share price could potentially face further pain. But there is also a suspicion that the stock has generally been oversold and will eventually reclaim some of the huge losses of the past several months.

How much of that loss of share price is reclaimed will most probably rely on take-up of the new ad-supported cheaper membership tier. There is huge potential there with the company estimating around 100 million viewers have been accessing the platform via shared passwords. That’s been clamped down on recently and will continue to be because Netflix is determined to monetise those 100 million viewers contributing nothing to its revenues.

If a big enough chunk of them opt for continued access at the cost of watching ads, the company’s revenue growth could quickly return to healthy levels again. And that could see some strong upside for the Netflix share price in the context of its currently deflated level.

The post After a near 10% rally this week can the Netflix share price make a comeback? first appeared on Trading and Investment News.

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Government

Aura High Yield SME Fund: Letter to Investors 24 June 2022

The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation….

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The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation.

Inflation and Monetary Policy 1,2

This week, RBA Governor Philip Lowe spoke about the department’s monetary policy intervention to tackle inflation in the evolving economic environment. Over the last six months, similar factors have continued to put pressure on food and energy prices – namely the war in Ukraine, foods on the East coast, and Covid lockdowns in China. The ongoing lockdowns in China are causing disruptions in manufacturing and production and supply chains coupled with strong global demand that is unable to be met. These pressures have forced households and businesses to absorb the rising cost of living.

To demonstrate the rise, the RBA reporting this week on Business Conditions and Sentiments saw:

  • Almost a third of all businesses (31 per cent) have difficulty finding suitable staff;
  • Nearly half (46 per cent) of all businesses have experienced increased operating expenses; and
  • More than two in five businesses (41 per cent) face supply chain disruptions, which has remained steady since it peaked in January 2022 (47 per cent).

* The Survey of Business Conditions and Sentiments was not conducted between July 2021 to December 2021 (inclusive)

Inflation is being experienced globally, although Australia remains below that of most other advanced economies sitting at 5.1 per cent. The share of items in the CPI basket with annualised price increases of more than 3 per cent is at the highest level since 1990 as displayed in the graph below.

With additional information on leading indicators now on hand, the RBA has pushed their inflation forecast up from 6 to 7 per cent for the December quarter, due to persistently high petrol and energy prices. After this period, the RBA expects inflation will begin to decline.

We are beginning to see pandemic-related supply side issues resolve, with delivery times shortening slightly and businesses finding alternative solutions for global production and logistic networks. Whilst there is still a way to go in normalising the flow in the supply side and the possibility that further disruptions and setbacks could occur, the global production system is adapting accordingly, which should help alleviate some of the inflationary pressures.

The RBA’s goal is to ensure inflation returns to a 2-3 per cent target range over time, with the view that high inflation causes damage to the economy, reduces people’s purchasing power and devalues people’s savings.

Household Wealth 3

Growth of 1.2 per cent in household wealth, equivalent to $173 billion, was reported in the March quarter. The rise was a result of an increase in housing prices in the March quarter. Prices have started reversing since that read.

Demand for credit also boomed, with a record total demand for credit of $218.8 billion for the March quarter. The rise was driven by private non-financial corporations demanding $153.2 billion, while households and government borrowed $41.9 billion and $17.5 billion respectively. 

We will likely see a significant shift in household wealth and credit demand in next quarter’s report given the rising interest rate environment, depressed household valuations and elevated pricing pressures. 

Portfolio Management Commentary

A lag in leading economic indicators has shifted the RBA’s outlook, with an increase in the expected level of inflation to peak at 7 per cent and rate rises to come harder and faster in the near term. From a portfolio standpoint we are not seeing any degradation in our underlying portfolio and open dialogue with our lenders has us confident in their borrowing base. We are maintaining a close eye on the economic environment to ensure we maintain the performance of our Fund and ensure our lenders are in a position to maintain performance and strive to capitalise off the back of economic shifts.

1 RBA Inflation and Monetary Policy Speech – 21 June 2022

2 RBA Inflation and Monetary Policy Speech – 21 June 2022

3 Australian National Accounts: Finance and Wealth

You can learn more about the Aura High Yield SME Fund here.

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Economics

Home Showings Across US Plunge 24%, Mortgage Rates Remain Elevated

Home Showings Across US Plunge 24%, Mortgage Rates Remain Elevated

Authored by Naveen Anthrapully via The Epoch Times,

Home showings across…

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Home Showings Across US Plunge 24%, Mortgage Rates Remain Elevated

Authored by Naveen Anthrapully via The Epoch Times,

Home showings across the United States have fallen, according to a report by the National Association of Realtors (NAR), with all four regions registering a decline.

Home showings—when a potential buyer takes a private home tour with an agent—were down by 24 percent year-on-year in May, with total showings across the country at 785,005, said the NAR SentriLock Home Showings Report. SentriLock is a lockbox and real estate management solutions company.

All four regions in the United States saw a decrease in showings year-on-year, with the Northwest falling by 55 percent, Midwest by 29 percent, West by 27 percent, and the South by 14 percent.

Total SentriLock cards fell 2 percent YoY to 214,868. The cards allow realtors access to Sentrilock lockboxes—which hold keys to a home and allow communal access to all real estate agents—and indicate the number of realtors who conduct the showing.

The number of showings per card, which reflects the strength of buyer interest per listed property, decreased 23 percent YoY in May nationwide. Region-wise, showings per card in the West fell by 29 percent, the South by 23 percent, and the Midwest by 22 percent. Only the Northeast registered an increase at 45 percent.

Meanwhile, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell by two points to 67 in June, which the organization called a “troubling sign” for the housing market and broader economy.

According to NAHB Chair Jerry Konter, the six consecutive monthly declines of HMI is a “clear sign of a slowing housing market in a high-inflation, slow-growth economic environment.”

This is the lowest HMI reading since June 2020. The index had hit a record high of 90 at the end of 2020 when the pandemic triggered strong demand for homes.

Elevated Mortgage Rates

The fall in home showings is happening as mortgage rates remain at elevated levels. A 30-year fixed-rate mortgage had an average interest rate of 5.81 percent as of June 22, according to data from Freddie Mac.

Realtor.com is expecting home prices and mortgage rates to continue climbing while home sales drop as buyers get priced out from homeownership, based on a June 13 analysis of market trends. The rise in mortgage rates is driven by the U.S. Federal Reserve hiking interest rates to control inflation, the company noted.

“Rising interest rates have shifted the foundation of the economy as well as the housing market. So many homebuyers take out mortgages so that rising rates affect how expensive homeownership is,” said the company’s Chief Economist Danielle Hale. “It’s causing buyers to make tough trade-offs and disrupting the housing market.”

Tyler Durden Sun, 06/26/2022 - 18:30

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