Global share markets remained under pressure over the last week on the back of continuing hawkish comments from the US Federal Reserve (Fed) and European Central Bank (ECB), and ongoing concerns about recession.

For the week, US shares fell 3.3%, Eurozone shares fell 1.4%, Japanese shares lost 3.5% and Chinese shares lost 2%. Australian shares had remained a bit more resilient through August (relative to global shares), helped by mostly positive earnings reports, but are now coming under pressure too, with a 3.9% fall in the last week.

Bond yields rose sharply as higher short-term interest rates for longer were factored in. Oil, metal and iron ore prices fell, with iron ore particularly hit by fears around new lockdowns in China. The AUD fell as the USD pushed higher.

In our view, shares remain at high risk of further falls in the short-term. Share markets ran ahead of themselves in the rally from their June lows into their mid-August highs, recovering just over half of their earlier decline, helped by mostly good earnings reporting seasons in the US and Australia.

As the US share market became overbought and hit resistance at its 200-day moving average, it became vulnerable to ongoing central bank hawkishness and recession risks and pulled back.

Central banks including the Reserve Bank of Australia (RBA) remain hawkish and a long way from a “dovish pivot”, as evident in comments by various Fed and ECB officials last week; recession risks remain high, running the risk of significant earnings downgrades; Historically, September has been the weakest month of the year for US and Australian shares, particularly when markets are already in a downtrend; and geopolitical risks remain high over Taiwan, Ukraine and the US mid-terms.

Australia’s jobs & skills summit

While some fear it was just a talk fest, if it helps resolve the log jam in fixing key problems in the labour market by bringing people together to find common ground on a way forward, it’s a good thing.

And it does appear some progress will be made, with key moves confirmed or likely in the following areas: an increase in the permanent immigration cap for this financial year to 195,000 (from 160,000) and increased training to help solve the labour and skills shortage; measures to reinvigorate the enterprise bargaining system to, in particular, soften the “better of overall test”, which should help boost productivity; and allowing pensioners to work extra hours without losing their pension.

A foreshadowed return to multi-employer bargaining could be a big risk if not managed carefully, to the extent it could impose cost increases on enterprises not able to cope and lead to increased industrial action, as was common in the 1970s. The problems with industry bargaining were partly why enterprise bargaining was introduced in the first place. The boost in immigration also risks exacerbating the shortage of rental property.

Economic activity trackers

Our Australian and European Economic Activity Trackers dipped in the last week whereas it rose in the US. All suggest a loss of momentum and slowing growth. In Australia, restaurant and hotel bookings are off their highs.

Australian economic events and implications

Australian data was mixed, with booming retail sales, strong Capex plans and weak housing indicators. Retail sales are 17.5% above their pre-COVID trend. This is likely exacerbated by inflation, but so far consumers are still spending. Higher rates, falling confidence and falling real wages point to softness ahead.

Construction and investment data was mixed in the June quarter. Construction fell, with declines in home building, non-residential building and engineering, as shortages and bad weather impacted. Reflecting this, business investment also fell slightly in the June quarter, but with a rise in plant and equipment investment.

Capex plans remained strong though, up 15% from a year ago, suggesting that despite the uncertainty, businesses are still planning to boost investment.

Finally, the slump in home prices accelerated in August and has now spread to 7 of the 8 capital cities, as well as regional prices. CoreLogic data shows that home prices fell 1.6% in August and are down 3.5% from their April high. Sydney prices are leading the way down and have fallen 7.4%.

We continue to expect a top to bottom fall of 15-20% out to the second half of next year, as ongoing rate hikes continue to impact. If the cash rate pushes much beyond 3%, as many expect, then price declines are likely to be deeper.

Five key points from the now completed June quarter earnings reporting season in Australia

1. Earnings growth last financial year was solid, at about 21.5% - which is in line with expectations at the start of the reporting season. This is pretty good, given the lockdowns, disruptions, shortages and inflation problems of last year.
2. Earnings growth was dominated by a 280% gain in energy earnings and a 21% gain for materials, with the rest of the market averaging 10% growth.
3. Positive surprises dominated misses by about 3 to 2, but the upside surprise has been trending down over the last 18 months.
4. The best is likely behind us for now, with the proportion of companies reporting rising earnings (on a year ago) and increasing dividends falling and now running below average (see the second chart below).
5. Earnings growth expectations for this financial year are being cut, reflecting the impact of rising labour cost pressures and expectations for slower demand growth. Consensus earnings expectations for this financial year have fallen from about 8% to 6.5% over the last month.