Each week The Last Word will offer a review of the week's events and their impact on the markets.
Peter Milios: Good afternoon, and welcome to this week's edition of The Last Word. I'm your host, Peter Milios. It’s the end of another week, and today I'm joined by Winston Sammut from Euree Asset Management. We're here to review the past week and potentially peer into the future to see what might be on the horizon. Welcome, Winston.
The big news from the week comes from the US Federal Reserve cutting rates for the first time in 4 years, with a 50 basis point cut.
Winston it is a very sizable move to start the cutting cycle. What are your thoughts and why did the Fed make such a big stance?
Winston Sammut: This cut aims to support the American labour market, which has shown signs of slowing down despite elevated inflation. Fed Chairman Jerome Powell noted that while the inflation target hasn't been fully met, the Fed is increasingly confident in its ability to recalibrate policy without exacerbating inflationary pressures. The decision represents a balance between addressing economic growth concerns and managing inflation. This move also saw internal dissent within the Fed for the first time since 2005, with Board Governor Michelle Bowman opposing the reduction and advocating for a smaller quarter-point cut. Her dissent highlights differing views within the Fed on the pace of interest rate adjustments. Despite this opposition, Powell indicated that further rate cuts could be forthcoming as part of a broader strategy to support the economy.
Peter Milios: Last night we also had more data come through regarding US jobless claims. Do you want to paint some colour on these figures?
Winston Sammut: Weekly jobless claims dropped to 219,000 for the week ending 14 September, the lowest level since May 18, and below the estimated 229,000. This decline signals a moderate pace of layoffs, as reported by the Labor Department. The figure was 12,000 lower than the previous week’s upwardly revised level. Meanwhile, continuing claims, which are reported with a one-week lag, edged down to 1.829 million.
Peter Milios: We also had some big economic news from China and New Zealand. The economic data for August reveals significant challenges for both China and New Zealand. Can you paint some colour on what the news was and its significance?
Winston Sammut: In China, industrial production growth fell to 4.5% year-on-year, down from 5.1% in July and below the Bloomberg estimate of 4.7%. Fixed asset investment growth eased to 3.4% for the first eight months of 2024, missing the projected 3.5%, and retail sales growth slowed to 2.1% year-on-year, down from 2.7% in July and underperforming the forecast of 2.5%. These figures indicate a weaker-than-expected economic recovery, with slowing momentum in key sectors.
Meanwhile, New Zealand's economy contracted by 0.2% in the second quarter, a smaller decline than the anticipated 0.4% by economists and 0.5% projected by the Reserve Bank of New Zealand (RBNZ). Despite the smaller contraction, New Zealand is expected to enter its second recession in under two years, with further economic contraction likely in the current quarter. The RBNZ began its easing cycle earlier than planned due to persistent economic weakness and controlled inflation. Senior economist Kim Mundy from ASB Bank noted that the prolonged period of restrictive monetary policy has contributed to economic fragility, and further labour market deterioration could impede a swift recovery. Following the report, the New Zealand dollar fell to 62.09 US cents, reflecting investor concerns about the country's economic prospects.
Peter Milios: And we also had economic figures come from Australia. In August, Australia's national unemployment rate held steady at 4.2% in August, with the number of employed people increasing by 47,500 and unemployed people declining by 10,500. The participation rate stayed at a record high of 67.1%, while the employment-to-population ratio slightly increased to 64.3%. What is the significance of these figures Winston?
Winston Sammut: The labour market remains tight, although a slow loosening is expected. Employment gains were mainly in part-time jobs, though full-time jobs still account for 77% of this year's employment growth. Despite the US cutting interest rates to prevent unemployment from rising, Australia's Reserve Bank (RBA) is unlikely to follow suit soon. Analysts believe the RBA will maintain a tightening stance to curb inflation until economic indicators deviate significantly from forecasts. While some economists expect a rate cut by December, others suggest that the RBA will wait until 2025 to avoid triggering inflation. Australia's slowing economy and labour market softening, particularly in job vacancies and underemployment, reflect broader economic challenges. However, the country is still creating many high-paying jobs. The tightening job market has led to difficulties for some job seekers, especially those with postgraduate degrees, who face high employer expectations and limited opportunities.
Peter Milios: And Winston, just to finish off I wanted to touch on highlights from certain commodities during the week. Prices of aluminium soared following a collapse at Vedanta's alumina refinery, whilst both copper and nickel saw gains in the wake of the refinery collapse – which is interesting because you wouldn't assume the commodities are necessarily interconnected and then oil prices have been climbing due to a combination of factors. We also had some news that Saudi Aramco’s stake in Australian LNG projects is increasing.
Firstly Winston, what has been driving the surge in these prices and how does Saudi Aramco’s stake in Australian LNG fit into their broader strategy?
Winston Sammut: In regards to aluminium, the collapse at Vedanta’s alumina refinery in India is a major concern for global aluminium supply. Alumina, derived from bauxite, is essential for producing aluminium, and disruptions like these exacerbate the tightness in the market. Prices on the London Metal Exchange surged 3% to $US2530 per tonne following the collapse. The aluminium market has already been strained by factors like Russian sanctions and operational issues at key refineries, so this incident only intensifies supply challenges. However, no human or livestock injuries were reported, which is fortunate.
Both copper and nickel saw gains in the wake of the refinery collapse, with prices rising 1.2% and 1.5% respectively. The metals market is quite interconnected, and any major disruption in one sector can affect the others. Copper, in particular, is sensitive to industrial output trends, and with issues like Typhoon Bebinca impacting China’s industrial activities, there’s a lot of uncertainty. While short-term supply issues persist, analysts believe a potential surplus could emerge by 2025, as Citigroup has forecast for oil markets.
Oil prices have been climbing due to a combination of factors. Libyan exports have been steadily declining due to stalled negotiations over control of the central bank, which is disrupting the country’s oil sector. Additionally, around 12% of oil production in the US Gulf of Mexico remains offline following Hurricane Francine.
Aramco is expanding its footprint in the LNG sector through its involvement with MidOcean Energy, increasing its stake to 49%. MidOcean holds interests in several Australian LNG projects, including Woodside’s Pluto LNG and Chevron’s Gorgon. Although financial details weren’t disclosed, the proceeds will be used to acquire an additional stake in Peru LNG. This move is part of Aramco’s strategy to diversify and strengthen its global energy presence. Their stakes in Australian projects, while relatively small in percentage terms, give them significant exposure to one of the world’s most important LNG-producing regions.
Peter Milios: Winston, thank you so much for your time.
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