Wed. Jul 6th, 2022

The pain at Target echoed Walmart’s similarly gloomy profit outlook a day earlier. Walmart’s stock fell 11.4 per cent on the result, and a further 6.8 per cent in US trading on Wednesday. That was enough to push the S&P 500 to a loss of 4 per cent, its worst session since June 2020.

Leading Melbourne-based hedge fund manager L1 Capital warned investors on Thursday that the days of easy returns fueled by record-low interest rates are extinct.

“As interest rates have fallen from 18 per cent to essentially zero over the last 30 years, the price of assets has continued to increase at roughly 10 per cent per annum for equities and property,” L1 Capital’s co-chief investment officer Mark Landau said .

“We think that those days are basically over, and the return that people should be able to get going forward will be much more modest.”

Although higher inflation expectations have become entrenched, Mr Landau warned that most investors have not adjusted their portfolios to reflect the severity of the surge in consumer prices. US inflation is still running at a 40-year-high, and has not moderated as quickly as expected.

Canada on Wednesday reported inflation at the highest level since 1991, rising 6.8 per cent in April on the annual measure. Earlier this week, UK inflation hit 9 per cent, also the highest in 40 years, as Russia’s invasion of Ukraine sustains a severe energy price shock in Europe.

Federal Reserve Chairman Jerome Powell said on Wednesday that interest rates were likely to continue to rise until there was clear and convincing evidence of soft inflation.

Walmart and Target’s results come at a critical juncture for global markets, which are desperately seeking clarity on how far central banks are willing to go to tame inflation.

Target chairman and CEO Brian Cornell confessed to analysts that the speed at which the surge in costs has upended the company’s outlook shocked management.

“As we [stood] in front of you and others in March, we did not anticipate the rapid shifts we’ve seen over the last 60 days, ”he said. “We did not anticipate that transportation and freight costs would soar the way they have as fuel prices were then risen to all-time highs.”

Walmart’s CEO Doug McMillon sounded a similarly ominous warning: “There is a lot of uncertainty looking forward. Things are very fluid. ”

Mr McMillon bemoaned the rise in the cost of staples such as milk, bread, canned tuna and macaroni-and-cheese. “On the food side, we’re seeing double-digit inflation, and I’m concerned that inflation may continue to increase.”

The concern for investors is that rising interest rates required to cool inflation will tip advanced economies into recession. This is despite almost record-low jobless rates around the world, including in the US, where unemployment was stable at 3.6 per cent in April.

“It must be said that the concern for inflation has never gone away since we stepped into 2022. However, while things have not reached the point of no return, they are seemly heading in the direction of out of control,” IG analyst Hebe Chen said.

“That is probably the most worrying part for the market.”

Aussie dollar punished

The fierce sell-off in equities triggered a heavy drop for the risk-sensitive Australian dollar, from which it partially recovered on Thursday following news Shanghai will ease COVID-19 restrictions and allow some businesses to resume activities in early June.

The currency jumped 1 per cent to US70.23 ¢, after sinking 1.1 per cent in the overnight session. There was little enthusiasm in the foreign exchange market after Australia delivered its lowest unemployment rate in nearly 50 years.

Unemployment came in at 3.9 per cent in April, from a revised 3.9 per cent in March. It was the lowest jobless rate since 1974.

The jobs report followed a slightly disappointing wage price index result which ticked up 2.4 per cent in the March quarter, from 2.3 per cent, missing forecasts for a 2.5 per cent gain.

“Added to the disappointing wages data yesterday, this suggests a 25 basis point cash rate hike at the RBA’s June meeting is more likely than a supersized 40 to 50 basis point hike,” ANZ senior economist Catherine Birch said.

The Reserve Bank forecasts unemployment to fall further to 3.8 per cent by June, and 3.7 per cent by the end of the year.

Earlier this month, the RBA lifted its then-record low cash rate of 0.1 per cent for the first time in more than a decade with a 0.25 percentage point increase to 0.35 per cent. It signaled further tightening to rein in inflation.

Markets have since debated whether it will follow up in June with an increase of 25 or 40 basis points.

Bond futures imply an 86 per cent chance of a quarter point move to 0.6 per cent, from a 100 per cent chance earlier in the week. They are wagering the Reserve Bank will have to lift the cash rate every month for the rest of the year to reach 2.6 per cent by Christmas. If correct, it would also require at least one super-sized increase over the remaining seven policy meetings.

Bond yields rose, with the three-year rate up 7 basis points to 2.99 per cent and the 10-year yield 9 basis points higher at 3.4 per cent in a yield curve steepening.

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