Calling a top in the market
CBA reported a record $5.15b AUD half-yearly profit on Wednesday 15th February, almost AUD$400m higher than a year earlier.
Rising interest rates boost net interest margins against the backdrop of a buoyant economy and record-low unemployment that is shoring up the credit portfolio.
In reporting the excellent results, Chief Executive Officer and Managing Director Matt Comyn of CBA called a top in the market, and the financial services sector is taking notice. XFJ is down 3.5% in morning trade.
Mr Comyn is forecasting a stabilisation of interest rates and topping out in net interest margin with persistent inflation starting to eat into the credit quality of its portfolio.
CBA loan impairment increased by $586m AUD, pre-empting a deterioration in customer financial stability.
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With unemployment having little way to go but up, financial services managers are applying conventional mean-reversion economic models to their business outlooks.
Bank leaders are anticipating a slowdown in hiring. That is on the back of a thinly stretched payroll, over-extended contractors pricing themselves out of the market, and projects being delayed.
Economic theory dictates that wage inflation will go stratospheric as the labour market tightens. Corporate boards expect policymakers would head off such an outcome with sharp interest rate rises shutting off hiring. The most likely outcome would be a softening labour market and retreating wage inflation that will hurt the broader economy.
With business leaders applying retrospective modelling to their forecasting, there are opportunities for the investor to pre-empt new trends that have yet to be taken into account.
There are exits for the market that don’t include a sharp hike in employment without the trade-off of stratospheric wage inflation. Any such scenario would require a sharp increase in productivity.
As it happens, these market-ready productivity tools are presenting themselves at the most opportune moment. Enter Artificial Intelligence (AI).
AI has the power to boost productivity massively. With the explosive introduction of OpenAI’s ChatGPT already being used by millions across the globe, productivity is increasing daily.
Boosting productivity means current labour markets can cover the development pipeline, and employment opportunities present themselves in transitioning to the newer AI-incorporated business operating models.
Jumping the gun
One swallow doesn’t make a summer, and one financial service’s corporate board putting up loan loss provision sandbags doesn’t make a recession.
There are potential exits to the tightness in the labour market, core price inflation pathways, and Australian GDP that do not result in an economic downturn.
The 6.5% reduction in CBA share price and a trailing 3.5% selloff in the broader financial services index XFJ may be jumping the gun if the untapped potential of AI comes to the fore in the coming months.