Markets and the outlook
Financial markets remain challenged by inflation, central bank activity, higher bond yields, rising Middle East tensions, higher oil prices and the looming US mid-term elections. While most asset classes generated positive returns, wild swings across the global economy continue to challenge markets. Despite the volatility we continue to focus on our medium-term outlook, but note that market dynamics have clearly shifted. Over the week the ASX 200 rose 0.4% and unhedged global equities gained 0.6%, led locally by AREITs (+3.7%).
Oil and the Middle East
Energy prices remain elevated. Increased military activity between Saudi Arabia and Houthi rebels, and renewed Iranian attacks on tankers in the Gulf, further complicate the peace outlook. The White House has signalled a pause in further strikes against Iran until after the mid-terms. China is expected to resume oil exports and the US is working with Russia to export diesel, despite European concerns, which has reduced immediate supply worries.
The Fed and US inflation
The US Fed raised the cash rate by 0.25% to 4.00%. Markets now focus on Consumer Price Index data (forecast +0.2% m/m, 3.6% headline, 2.5% core) and Producer Price Index data. With little change expected in inflationary pressures, we expect the Fed to raise rates further. Our terminal rate for the Fed Funds Rate is 4.5% (+0.5%).
The week ahead
Domestically, NAB Business Conditions and employment data (forecast unemployment rate 4.6%, no change) are the main releases. In China, third-quarter GDP (forecast 4.3% y/y), CPI (1.0%), PPI (4.5%), retail sales, industrial production (5.4%) and trade data will signal the strength of the economy. Pressure on domestic growth remains, but activity is sound, led by the ongoing trade surplus. In Europe and the UK, CPI, trade and industrial production data are the key releases.