Why the ASX200 is rising off fresh lows and what higher unemployment means when investing

Jessica Amir joined discussion · Apr 18, 2024 14:26

The $XJO #ASX200 was 'oversold' and made two higher highs, rising off fresh lows. This is a positive technical sign, that bad news could be behind us.

But I am not that convinced about the ASX200's two-day move just yet. As it seems the market could still be vulnerable (remember we still need to erase those Fed cuts that everyone expected), so exercise caution if you are a short term investor or trader.

But, what supported the rally up today for the ASX200?

1- positioning ahead of options expiry (132 names in the $S&P/ASX 200 (.XJO.AU)$ are up)

2 – better than expected mining company results +announcements, broker upgrades plus #commodity prices rose such as #IronOre + 1%,#Copper+1.2% #aluminum+1%. BHP $BHP Group Ltd (BHP.AU)$ rose 1.5% after reporting its output rose and its on track to meet copper, iron ore and energy coal production for the year BHP has 10 buys, 14 holds and 3 sells). $Rio Tinto Ltd (RIO.AU)$ rose 2.1% after Citi and Morgan Stanely remained bullish on the miner after it reported its results with Rio expecting steel exports out of China to remain historically elevated and to support iron ore demand. Rio saw higher YoY copper output, alumina and aluminum production. It is expected to produce first lithium by the end of this year.

3- The biggest contributor to CPI #oil has fallen 2.5% from its fresh highs. And AU unemployment rose showing the obvious sign (that higher rates, rents, the cost of breathing) is hurting Australia, so don't expect rates to rise or be cut either.

I shared some of these comments + more in an interview with Reuters today.

Why the ASX200 is rising off fresh lows and what higher unemployment means when investing

Australian unemployment rose, it will probably rise again, so where do I invest?

Australian employment unexpectedly dropped in March with the Aussie economy shedding 6,600 roles, compared with a forecasted gain of 10,000 and following that huge 100,000 jump in February. While unemployment rose 3.8% from 3.7% in February. This shows employment is still somewhat strong with an “employment-to-population ratio and participation rate still close to their record highs,” (ABS).

This reflects two things, that restrictive monetary policy is hurting employers with unemployment expected to rise through the year as the interest rates lag effects and higher costs impact the economy. But secondly, this also reflects that our economy is still quite strong and rates won't need to be cut.

The cash rate in Australia is at 12-year high, 4.35% which is where rates will probably stay, given inflation has been creeping up.

Some economists think the RBA will cut rates later this year, but I am not buying into that, as inflation is sticker than expected which is why I see that the RBA Cash Rate Futures have NOT fully pricing in any cuts this year.

Today's job figures, plus the quarterly inflation due next week, will help shape debate at the RBA's May 6-7 policy meeting. Some economists think CPI released next Wednesday for Q1 will be under 4.1%, which was the prior YoY read. But guess again.

I think inflation will blow hotter than that because rents are up with seasonality and oil prices are up 16% this year. So- Expect rates to stay as they are this year.

So what can you expect ahead? Well you will probably see inflation rising, unemployment rising, the RBA think it will get to 4.5% and the RBA doesn't see inflation getting to its 2-3% target till late 2025. And this reflects that the last stretch of bringing down prices, is the toughest.

But I come baring gifts, that things might not get as bad as the RBA thinks. Consensus thinks CPI will fall to 3.3% this year and unemployment will rise to 4.3% (which is not quite as bad as the RBA fears), while GDP is expected to fell to 1.4% this year, down from 2.1% last year. See forecasts below.

So what does this mean for investors? Well, you should consider rotating your portfolio and putting some capital in quality assets and sectors that do well when the economy slows and inflation remains stubborn. So think quality businesses with high repeatable cash flows, that continue to earn money even as economic growth cools. So think health care companies, consumer staples.