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Finance sector

CBA results drag down the finance sector as ASX trades lower on international inflation nerves.

Background – finance sector

Australian shares were trading lower on Wednesday last week as investors were awaiting crucial inflation data from the US and came to terms with price increases in China.

Inflation has transpired to be one of the most significant issues encountered by economies worldwide as nations re-open from the pandemic shutdowns while they are dealing with supply chain woes and grappling with the hangover from the emergency level low-interest rates.

The US has already been showing soaring inflation.

US Inflation Rate Slowing to 8.7%

The yearly inflation rate in the US slowed to 8.7% in July 2022 from a 40-plus year high of 9.1% hit in June as gasoline and airfares eased prices. Gasoline inflation will ease to 44% year-on-year in July, from 60% in June, while other components, including food and rents, remain elevated.

Core inflation, which mitigates more volatile food and energy prices, is predicted to accelerate to 6.1% from 5.9%.  Subsequentially, pausing three months of deceleration and confirming high inflation is spreading throughout the economy. Compared to the preceding month, the CPI rose 0.2% after hitting a 17-year high of 1.3%, and the core one will record a minor increase of 0.5% compared to 0.7%.

US Inflation Rate Forecasts at 8.5%

The US annual inflation rate slowed, more than anticipated, to 8.5% in July of 2022 from a 40-plus year high of 9.1% hit in June and below market forecasts of 8.7%. On the other hand, energy CPI rose by 32.9%, after hitting a 42-year high of 41.6% in June, primarily due to a significant deceleration in gasoline costs (44% vs 59.9%), natural gas (30.5% vs 38.4%), and fuel oil (75.6% vs 98.5%). Additionally, electricity prices accelerated (15.2%, the most since February 2006).

Cost also relaxed for new vehicles (10.4% vs 11.4%) and airline fares (27.7% vs 34.1%), but inflation continued to increase for food (10.9%, the most significant increase since May of 1979, vs 10.4%); used cars and trucks (6.6% vs 1.7%); and shelter (5.7% vs 5.6%). Compared to the preceding month, the CPI was unmodified after hitting a 17-year high of 1.3% and below forecasts of 0.2%. Core inflation was steady at 5.9%, beating expectations of 6.1% and offering some support that inflation has finally peaked.

Australian finance sector – inflation

In Australia, annually, the official rate is now at 6.1 %.

As a result, rate hikes are being implemented, which impacts borrowers and discretionary spending.

Wall Street’s two majors fell overnight, and the Nasdaq lost 1.2 % as rate-hike fears hit tech stocks.

“Risk appetite remains cautious ahead of tonight’s US CPI data,” said ANZ economists.

The inflation data from the world’s biggest economy could indicate either price hikes are decelerating or that they are continuing implacably.

High inflation could initiate further rate increases, although the US Federal Reserve has already hinted that it will not go too impactfully.

China’s most recent inflation data came out last week, with its official numbers showing prices rose by 2.7 %. That’s the most since July 2020.

ANZ forecasts that inflation in China will rise to between 3 and 4% soon, which is more than the official target.

It indicated this is largely due to an overlap between the pork and oil price cycles.

Pork has been ascending in price as the country continues to rebuild its stocks from the swine fever flare-up, coinciding with demand increases from restaurants after post-COVID re-openings.

Oil prices are also higher, both for edible oils and fossil fuels, also due to many recent supply chain issues.

China’s Hang Seng had dropped around 2% by mid-afternoon trade.

CBA negatively impacts the finance sector

The Australian share market was mirroring global sentiment descending in late afternoon trade.

Of the 11 major sectors, ten were down.

Commonwealth Bank was 0.4% lower, despite it releasing results that showed it was increasing its profit following the impacts of the home-loan boom. However, the results also indicated margins were coming down while rate increases were hitting home-loan margins.

The other major banks were higher, with ANZ making gains of up to 3.5%.

Other stocks trading lower included milk company A2, which had lost more than 11%.

That was after it told the market regulators had knocked it back in the United States to sell its baby formula there.

Meanwhile, GrainCorp gained 5.9 % after it released its results, and GrainCorp raised its underlying net profit after tax.  It was forecast to be between $365 and $400 million, from $310 to $370 million.

It said it benefited from solid crop yields, which fetched high global prices as a crux on supply continues because of the war in Ukraine.

GrainCorp also said it benefited from reasonable vegetable oil prices, which have escalated due to a range of global supply issues.

Meanwhile, the ANZ released in a statement that the Australian dollar was a touch lower after the US dollar “recovered some strength amid higher US bond yields”.

Five things to survey on the ASX 200

On Friday last week, the S&P/ASX 200 Index (ASX: XJO) disappointingly finished the week. The benchmark index fell 0.5% to 7,032.5 points.

Will the market bounce back from this? Here are five things to watch:

ASX 200 expected to rebound

The Australian share market appears set to rebound on Monday following a solid night on Wall Street on Friday. On Wall Street, the Dow Jones was 1.3% up, the S&P 500 climbed 1.7%, and the NASDAQ jumped 2.1%.

Oil prices fall

Energy producers Santos Ltd (ASX: STO) and Woodside Energy Group Ltd (ASX: WDS) could be this week in the red following a tumble in oil prices on Friday. As reported by Bloomberg, the WTI crude oil price dropped 2.4% to US$92.09 a barrel. The Brent crude oil price fell 1.45% to US$98.15 a barrel. Oil prices came under pressure on speculation that US Gulf supply disruption will ease.

Westpac Q3 update

The Westpac Banking Corp (ASX: WBC) share price will be one to watch on Monday when the banking giant releases its third-quarter update. The market is likely looking for an update on how Australia’s oldest bank’s cost-cutting program is progressing and how its margins have fared since rates started to rise.

Gold price rises

Gold miners Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) could have a decent start to the week after the gold price pushed higher on Friday night. According to CNBC, the spot gold price was up 0.45% to US$1,815.50 an ounce. The precious metal recorded its fourth straight weekly gain after the US dollar softened.

Bendigo and Adelaide Bank results

Westpac isn’t the only bank releasing an update today. Bendigo and Adelaide Bank Ltd (ASX: BEN) shares will be on watch when the regional bank releases its full-year results. According to a note from Goldman Sachs, its analysts expect the bank to report a cash profit of $502 million and pay a full-year dividend of 123 cents per share.

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