China will lose its position as the top exporter to the US in the first half of 2023 for the first time in 15 years, with Mexico and Canada now both ahead of China following post pandemic onshoring and nearshoring trends.
Australian Share Market (ASX 200) – up 3.7% and bouncing back strongly from last week’s 3 month low. Offshore leads were positive as disinflation and soft-landing themes gained traction. It was a strong week with gains led by the Info Tech sector (+6.37%), Materials (5.75%) and Consumer Discretionary (+4.52%) with Health Care (-0.37%) the only sector lower. It was also an eventful week with the lower-than-expected U.S inflation report sending equities, risk assets and gold higher, while the USD and bond yields fell. By the end of the week several economists and commentators were reassessing their outlooks with UBS the first large investment house to break with the consensus view for a US recession this year. They provided 10 reasons why the economy has avoided a recession which boiled down to monetary policy only recently becoming moderately restrictive, the private sector being in fundamentally good shape, and the economy having evolved to become less cyclical in their view. They also noted the consequences and normalization of the extreme pandemic-related dislocations from normal late-cycle behaviour has made assessing the economy more difficult. Domestically, the Westpac-Melbourne Institute Consumer Sentiment index rose from 79.2 in June to 81.3 in July although remains in deeply pessimistic territory with the lift this month likely on the back of the monthly inflation indicator easing from 6.8% April to 5.6% in May. The NAB Business Survey showed business conditions continued to ease, falling by 7 points to +8 in May with notable declines across the trading, profitability, and employment sub-components and Business Confidence fell to -4 points with most industries now in negative territory. In a speech last week RBA governor Lowe signalled a less aggressive outlook for interest rate rises going forward and revealed significant changes to the RBA following the recent independent review. The number of annual board (rate setting) meetings will be cut to 8 from 11 from next year, with a press conference to be held after every meeting to enhance communications. A new RBA governor, Michele Bullock, was also announced last week. Bullock is the current deputy governor and will commence the new role in September.
U.S. Share Market (S&P 500) – up 2.42%, with the Dow (+2.29%), and Nasdaq (+3.32%) also higher. Disinflation and soft-landing themes gained further traction last week with the June CPI coming in a bit lower than expected with a 0.2% monthly gain softer than expectations for 0.3%. Annualized CPI of 3.0% was also a tad below estimates for 3.1% and the lowest since March 2021. Headline Producer Price Inflation also fell last week to the lowest since August 2020. The USD fell sharply to a new 15 month low as USD denominated assets rose. Bond yields pulled back further from recent highs and the S&P 500 and Nasdaq rose to new 2023 highs. Gold, base metals and oil also rallied and was a bit hard to tell if it was things going up or the USD going down. The CPI report is unlikely to alter the Fed’s expected rate hike at their upcoming meeting later this month but did prompt a significant repricing of the expected path for interest rates. The July hike is now expected to be the last hike for this cycle from the Federal Reserve, down from at least 2 more hikes expected at the beginning of the week. And with the July peak now priced in, the expected 2024 rate cuts have also been repriced and now expected to start in January, brough forward from May although longer term bond yields remain elevated. US Consumer sentiment improved with the University of Michigan consumer sentiment at 72.6, well ahead of the 65.5 expected and the highest since September 2021, and banks got the reporting season underway, with some strategists starting to lean more cautious after the strong 1H rally. Sixty S&P 500 companies (including 5 Dow components) report this week as earnings season ramps up. S&P 500 earnings are expected to fall around 7% in Q2 from the year ago period, the 3rd quarter in a row of falling earnings. Q2 is also expected to be the earnings trough with EPS growth currently expected to stabilize in Q3, then resume growth in Q4.
Amazon (AMZN) announced last week that the first day of their Prime Day (July 11) was the single largest sales day in the company’s history. Over the 2 days Prime members purchased more than 375 million items worldwide. Amazon offered more deals than any past Prime Day event, with Home, Fashion, and Beauty among the top-selling deal categories, and Fire TV Stick, LANEIGE Lip Glowy Balm, Apple AirPods, and Bissell Little Green Portable Deep Cleaner among the top-selling deals. Amazon has more than 200 million paid Prime members in 25 countries around the world with memberships in the US costing $139 per year.
Citigroup (C) beats Q2 estimates as profit falls. Citi reported Q2 EPS $1.33 on Friday, slightly ahead of the $1.31 expected. Although net income was down 36% on Q2 last year with profits weighed down by higher costs for layoffs and increased provisions for credit losses. In markets, “clients stood on the sidelines in April while the debt ceiling played out,” said CEO Jane Fraser. Adding, “the long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter.” Although Citi posted double-digit revenue growth each in its services unit as well as treasury and trade solutions. Net interest income (NII) jumped 18% with Citigroup raising full year guidance for NII by $1 billion. “The U.S. economy is proving to be quite resilient, with strong balance sheets both on the consumer side and the corporate side,” said CFO Mark Mason on the conference call adding that delinquency rates in credit cards and other retail lines are rising and expected to reach “normal levels” by the end of the year..
Microsoft (MSFT) to trim more staff – Gets favourable court ruling on Activision Blizzard takeover. Microsoft confirmed last week they are still cutting jobs, on top of the 10,000 payroll cuts announced earlier this year. The cuts will mainly impact sales and customer service reps with a spokesperson commenting “Organizational and workforce adjustments are a necessary and regular part of managing our business,”. Separately in the court battle over the Activission Blizzard takeover a judge has denied the Federal Trade Commission’s motion for a preliminary injunction to stop Microsoft from acquiring the video game maker. Microsoft agreed to buy Activision Blizzard for $68.7 billion, or $95 per share back in Jan 2022, but the acquisition has faced opposition in the U.S. and abroad over concerns that it could stifle competition.
The Week Ahead
Domestic economic highlights this week include the RBA July meeting minutes tomorrow, Westpac Leading Index on Wednesday, and the June employment data on Thursday is the highlight. Expectations are for another 13.5K jobs gain, down from the blowout 75.9K gain last month, and for the unemployment rate to rise to 3.7% from the current 3.6%.
International highlights include China GDP and Industrial Output today and US Empire State Index tonight. US Retail Sales, Capacity Utilization, Industrial Production, Business Inventories and NAHB Housing Market Index are all tomorrow night. Wednesday night has UK PPI and CPI and US Housing Starts. Philadelphia Fed Index is Thursday with Eurozone Consumer Confidence, US Existing Home Sales, and US Leading Indicator on Friday night.
Corporate reporting ramps up with Q2 earnings for Bank of America tomorrow night and Woodside Q2 production on Wednesday. Quarterly production reports from BHP and Santos are Thursday with earnings releases from Johnson & Johnson (Q2), SSE (Q1), and Freeport (Q2) on Thursday night.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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