Inflation (redux)

As a follow up to our earlier note on Wednesday’s hotter than expected monthly print; it is amazing how one can look at the below and think “yes, I can see inflation has stopped going down, and is even reaccelerating”.

And then you look at the monthly print annualised (so not the 3M annualised) and come away thinking “yep, a few hot months, but the trend in CPI x volatiles and travel (travel, as we noted, is massively volatile) is clearly coming down. Some bumps in the road, sure, but each time we’ve seen an uptick previously it was swiftly enough given way to a gradual, disinflationary trend back to target (2-3%).

If it was the case that excess demand caused most of the inflation (after the supply shock of 2020-21, the baton “handed over” to aggregate demand driven) then the below retail sales data suggests that it is surely running out of puff (at least, it seems reasonable to think so, especially given the widespread consumer downgrades we are hearing about).

And, as we wrote about earlier, the building approvals data, and the work done (WD) in construction (C) strongly suggest that rate sensitive areas like housing investment, and investment in general, are hurting, even if it is not uniform in nature (today’s capex data didn’t seem too bad).

Trying to take all of it together; we still think inflation will be tamed in time. Whether it is via the hard landing, or soft landing, isn’t as clear as it was back in January.

Given the ASX is on 16-17x forward PE, with fairly modest earnings growth (negative this fiscal year, given the May bank result numbers) over the next two years, an UW to Aussie shares seems warranted. Not none, not even close to that, but less than the SAA weight, which is how we are positioned.

With Aussie shares we are defensively positioned, although all of our defensives have, by and large disappointed at the margin (SHL, AMC and TLS have not been feeling particularly “defensive” of late, even as we think they are very good companies over the longer term).

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