The morning catch up: Inflation still fuelling investor fears; retail sales and CPI on the radar

The ASX broke a four-day drought on Friday to finish in the green, but it was a hard slog and the market is expected to lose its Friday momentum today.

ASX 200 futures are trading 18 points lower, down -0.25% as of 8:20 am AEST. The share market edged up 0.1% on Friday.

Earlier in the day, the main benchmark dropped to a six-month low before paring losses.

Energy and utilities led by higher oil prices were to thank for the reversal. Santos Ltd rose 0.7% to $7.64, Woodside Energy Ltd added 0.6% to $36.25 and Beach Energy (ASX:BPT) Ltd edged 0.3% higher to $1.625. Origin rallied 1.8% to $8.86.

Of 11 sectors on the ASX 200, five retreated with tech and property leading losses on the back of sustained higher interest rates.

What happened last week?

Here’s what we saw (source Commsec):

US markets

Fell again on Friday. The consumer discretionary sector lost 0.9% while the only gainers were technology (up 0.3%) and energy (up 0.2%). Shares in Ford Motor (NYSE:F) rose 1.9% after the United Auto Workers union reported progress in talks with the automaker.

• The Dow Jones index fell by almost 107 points or 0.3%
• The S&P 500 index lost 0.2%.
• The Nasdaq index fell by 12 points or 0.1%.
• Over the week the Dow fell 1.9%; the S&P 500 fell by 2.9%; and the Nasdaq fell by 3.6%.

European markets

Were mixed on Friday. Data showed lower readings for French purchasing manager indexes (PMI) while German PMIs rose. And British retail sales volumes rose 0.4% in August after falling 1.1% in July.

The continent-wide FTSEurofirst 300 index fell by 0.4% to be down 1.9% on the week. But in London, the UK FTSE 100 index rose by 0.1%.

Across Europe, the construction and materials sector fell by 1% on Friday and euro zone banks fell by 1.4%. But technology rose 0.8% and energy and mining sectors both gained 0.3%.

Currencies

Were mixed against the US dollar in European and US trade.

• The Euro held between US$1.0615 and US$1.0670 and was near US$1.0650 at the US close.
• The Aussie dollar rose from near US64.17 cents to near US64.65 cents and was near US64.40 cents at the US close.
• The Japanese yen held between 147.95 yen per US dollar and JPY148.42 and was near JPY147.37 at the US close.

Commodities

Global oil prices were mixed on Friday. Investors expect that tight global monetary policies will restrain oil demand. But supply will also be restrained by OPEC production restrictions. Also, Russian state media Tass said that Russia's Transneft suspended deliveries of diesel to the key Baltic and Black Sea terminals of Primorsk and Novorossiysk on Friday.

• The Brent crude price fell by US3 cents on Friday or less than 0.1% to US$93.27 a barrel.
• The US Nymex crude price rose by US40 cents or 0.4% to US$90.03, a barrel.
• Over the week Brent fell by 0.3% - the first decline in four weeks. US Nymex fell by 0.8% over the week.

Base metal prices were generally higher on Friday.

• The copper futures price was flat and aluminium futures rose by 1.2%.
• Across the London Metal Exchange, metals rose by between 0.4-2.1%.
• Over the week zinc and aluminium rose by near 2.5% while other metals eased by near 2.5%
• The gold futures price rose by US$6 an ounce or 0.3% to US$1,945.60 an ounce.
• Spot gold was trading near US$1,925 an ounce at the US close. Over the week gold fell US60 cents.
• Iron ore futures fell by US36 cents or 0.4% to US$121.33 a tonne. Over the week iron ore rose by 4 cents.

What's next for Australian market?

Wealth Within chief analyst Dale Gillham runs the ruler over what to expect in the market in the coming weeks.

“The roller coaster ride in the market has continued as the All Ordinaries Index has reversed the direction again compared to the prior week.

"Since the end of July, the Australian stock market has pretty much been a story of one week up and one week down. That said, the bears have been more aggressive over the two weeks, one of which is this week, with the market down nearly 3%.

“Given what has transpired in recent months, we may see this type of volatility in our market continue over the short term, which means we can expect further falls.

"Despite trying to be more positive in the bullish weeks, I have continued to warn investors that we needed to be prepared for a fall down to around the 7,000-point support level.

"This now looks more certain, and I believe this will occur soon, after which we will experience a sustained bull run. As I continue to say, anything is possible in these current conditions; therefore, you need to be patient, and if you hold good stocks, ensure you have an exit strategy.

Three things to watch

eToro market analyst Josh Gilbert gives us a rundown of what to expect this week.

1. Australian CPI on Michelle Bullock’s radar

As Michelle Bullock settles into her first few weeks as the new Governor of the Reserve Bank, she’ll be hoping next week’s monthly CPI reading doesn’t throw a curveball.

Monthly inflation has continued to decline meaningfully since peaking in December 2022 at 8.4%, with July showing a decline to 4.9%. However, that downtrend may stall next week with the expectation for inflation to pick back up marginally to over 5%.

The RBA has maintained their hiking cycle pause for the last three consecutive meetings and if that were to change, it would likely be due to an upside surprise in inflation. The recent jump in oil prices may be a worry in the short term and poses a risk to the inflation outlook. This supports the RBA’s positioning on keeping the door ajar for further hikes if they deem necessary, should inflation pressures persist.

Markets, however, still believe that inflation is moving in the right direction, with markets pricing just a 50% chance of another hike by the RBA by year-end. The good news is that we think the current oil rally self-corrects as higher prices stoke conservation efforts whilst triggering global macro-driven demand slowdown fears.

2. Will retail sales show the Aussie consumer is still holding up?

Next week, investors get a view of the state of the Australian consumer households with incoming monthly retail sales data. Consumer sentiment surveys have recently shown that consumers are still pessimistic despite the RBA keeping rates on hold for three consecutive months. Clearly, the lagging impact of rate hikes and cost of living pressures are impacting consumer habits.

Consumers are shelving the idea of buying big-ticket items, and other discretionary spending is being dampened by the jump in petrol prices in recent months. However, how consumers feel, and what they actually do, isn’t in sync.

Last month, retail sales increased more than expected, jumping 0.5%, with spending continuing to remain near record levels.

One factor impacting this figure is the strong jobs market with consumers feeling confident in their job security, giving some freedom to spend. Next week's reading is expected to show another increase of 0.2%, but interest rates at decade highs may keep chipping away at the resilient consumer.

3. Liontown Resources (ASX:LTR) - full-year accounts

Reporting season has concluded, but some companies are still updating investors across the Australian market. Next week sees the ASX200’s best-performing stock, Liontown Resources (ASX:LTR) Ltd, up more than 120% in 2023, announce its full-year accounts.

The lithium miner has been on a tear since US lithium giant Albermarle proposed a takeover at $2.50 a share back in March, which Liontown rejected. Albermarle has since sweetened the deal with a ‘best and final’ offer at $3.00 a share, with the door still open for the takeover to be completed and shareholders to be rewarded - particularly those that bought shares in the 2018 IPO at $0.03 a share.

Albermarle is looking to Liontown to expand its lithium production as the world’s appetite grows for electric vehicles, especially given Albermarle’s supply agreements with auto giants Ford and Tesla (NASDAQ:TSLA).

Other lithium miners, Pilbara Minerals and IGO, announced record profits and mountains of cash in their full-year results, and Liontown investors will be hoping for the same positivity next week.

A note on inflation

We are not out of the inflation woods yet. While iron ore, copper and oil dominate discussion, it’s soft commodities that deserve a wary eye.

Cattle prices are at their highest levels ever, up around 20% year-to-date, while olive oil prices have more than doubled in the past 12 months. Orange juice prices are up 70% year-to-date and sugar prices are up 31% year-to-date.

Monthly data reveal a decrease in Australia's food inflation to 5.6% in July, from 7.0% in June and 7.9% in May. Despite this decline, challenges remain in combating inflation effectively.

What about small caps?

The S&P/ASX Small Ordinaries (XSO) finished the week 0.037% higher at 2,728.10. However, over the five days it was 2.95% down.

It has been a slow morning on the news front, partially due to the King’s Birthday holiday (it would be nice if the states could co-ordinate one date for the King’s birthday holiday across the country).

In the news today…

Lithium Australia Ltd (ASX:LIT, OTC:LMMFF) announced that the independent testing of its LFP cathode material confirmed the product to be of a high quality, either matching or exceeding the competitor set across capacity, stability, and high-temperature performance.

AdAlta Ltd (ASX:1AD) reported results of dose simulation studies which support the potential efficacy of AD-214 in fibrotic disease at planned Phase II doses. The simulations also highlight the possibility that AD-214 could be delivered subcutaneously at lower doses, further enhancing the potential of the product.

Australian antiviral drug development company, Island Pharmaceuticals Ltd (ASX:ILA) shared a summary of recent activities and announce an agreement key to supporting the Single Ascending Dose study for ISLA-101.

Cooper Metals Ltd (ASX:CPM) announced it has signed a Binding Term Sheet (BTS) for the 100% acquisition of tenement EPM19686 near Cloncurry in Northwest Queensland.

Intra Energy Corporation Ltd (ASX:IEC) has entered into a binding agreement to acquire 100% ownership of 12 mineral claims covering 12 square kilometres located immediately adjacent to and surrounding the existing Llama Lithium Project within the James Bay region of Québec, Canada which is rapidly establishing itself as a hard rock lithium exploration ‘hot spot’.

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