The European Central Bank is set to raise interest rates on Thursday for the first time since 2011. Eurozone inflation hit a record 8.6% in June and the ECB’s reluctance to hike rates sooner, while the US Federal Reserve has been aggressively hiking, has contributed the Euro falling to parity with the USD last week for the first time in 20 years.
Australian Share Market (ASX200) – down 1.08% on soft offshore leads and cautious trading although volatility was noticeably lower than it has been in recent weeks. Defensive exposures outperformed again with the Healthcare sector (+3.54%) leading the gains followed by Consumer Staples (+1.24%). Info Tech (+0.33%) was the next best as investors continue to look for a bottom in Tech stocks after a brutal 45% decline for the sector over the past 9 months. The Materials sector led the declines again and dragged the broader market lower, down another 6.06% last week for the sixth weekly decline in a row, followed by Energy (-0.51%) and Industrials (-0.47%). Industrial metals fell further on concerns around global growth and the oil price fell back to pre Ukraine war levels from late February. China Q2 GDP disappointed as the prolonged lockdowns took their toll with a larger than expected economic contraction which dragged the iron price back below US$100 per tonne for the first time in eight months. NAB business confidence fell to +1 in June from +6 in May while business conditions fell two points to +13 which is still a high number underpinned by elevated levels of trading, profitability, employment, and forward orders. The Westpac consumer sentiment index fell another 3% in July, its eight monthly decline and the lowest levels since the GFC with consumers becoming increasingly sensitive to inflation and concern around future rate hikes with more respondents bearish about property prices and the 12 month economic outlook according to the report. Employment data was very strong with our economy adding 88.4k jobs in June and way ahead if the 30.0k increase expected. The unemployment rate fell to a new 48 year low of 3.5%, well below the 3.8% expected and a big step down from the 3.9% prior with the strong jobs number cementing expectations of another 50 basis point rate hike when the RBA meet in August with markets also now pricing in the possibility of a 75 basis point hike. The RBA’s next move will largely depend on our Q2 Consumer Price Inflation report which is due next week.
US Share Market (S&P 500) – down 0.93%, with the Dow (-0.16%) and Nasdaq (-1.57%) all slightly lower in cautious trading as inflation data came in hotter than expected and the Q2 corporate earnings season got underway. Headline inflation in June accelerated further, up 1.3% for the month to be up 9.1% for the year, and well ahead of the 8.8% expected. It was the highest annual inflation rate since 1981. Annualized core inflation fell 0.1% to 5.9% but was still higher than the 5.7% expected. Energy prices were a big contributor up 3.5% for the month with gasoline up 11.2% although inflation was increasingly broad based with rents seeing their biggest monthly increase since 1986. Producer prices also increased more than expected and combined with the consumer price data, markets started pricing in a very large 100 basis point rate hike at the upcoming Federal Reserve meeting next week before pairing those expectations back to another 75 basis point hike. There was some inflation relief last week though as US gasoline prices fell to a 4 week low as oil prices retreated and the closely watched University of Michigan consumer sentiment report’s Inflation expectations, a key input into the US Federal Reserve’s interest rate setting decisions, fell to 2.8% from last month’s downwardly revised 3.1%. Second quarter earnings got off to a mixed start as the big US banks reported. JPMorgan and Morgan Stanley disappointed before Citigroup steadied the ship with much better than expected Q2 result. According to FactSet Q2 S&P 500 Earnings Per Share is expected to grow 4.1% over the year in Q2. It would be the slowest growth since late 2020. Bottom-up S&P 500 EPS estimates for Q2 have fallen by 1.1% over the course of the quarter which is a fairly mild downgrade considering the index has fallen 20% over the past 6 months. The bottom-up EPS estimate for the 2022 calendar year have actually increased by 0.8% over the course of the quarter and this is the part the market is cautious about. The demand backdrop for Q2 should have remained strong if the employment and retail sales data is anything to go by. It will be the forward guidance and profit margins that will be in focus as inflation accelerated during the quarter.
Citigroup (C) Q2 results stronger than expected. Citigroup posted some much better than expected Q2 results on Friday with earnings per share of US$2.19 vs FactSet estimates of US$1.68 and revenue of $US19.64 billion was also well ahead of the US$17.45-US$18.99 billion expected. Citi CEO Jane Fraser said “Treasury and Trade Solutions fired on all cylinders as clients took advantage of our global network, leading to the best quarter this business has had in a decade. Trading volatility continued to create strong corporate client activity for us, driving revenue growth of 25% in Markets. While economic sentiment clearly impacted Investment Banking and Wealth Management, we continue to invest in these businesses and we like where they are headed. In U.S. Personal Banking, the positive drivers we saw in our two credit cards businesses over the last few quarters converted into solid revenue growth this quarter, most notably a 10% growth in Branded Cards. In a challenging macro and geopolitical environment, our team delivered solid results and we are in a strong position to weather uncertain times, given our liquidity, credit quality and reserve levels.”
Google (GOOG) splits stock on 20 for 1 basis. Google (Alphabet) split its stock on a 20 for 1 basis late last week. The stock split will see clients holding 1 share worth around US$2400 per share, go to 20 shares worth around US$120 per share this week so no change in overall value. Google announced the stock split with its full year earnings in February with shareholders approving the split in June. The company has seen its share price increase nearly 40-fold since its initial public offering back in 2004 at US$85 per share.
Amazon (AMZN) prime membership flatlines after price hike and 2020-2021 surge. According to a research report by Consumer Intelligence Research Partners, Amazon’s number of Prime members in the US flatlined in the first half of the year. They suggested the recent $20 annual price increase could be to blame but also a high base effect as membership numbers surged during the pandemic. The online retailer had about 172 million US members as of June 30, the same as six months earlier. The prices increase, combined with broader inflation pressures and the resumption of pre-pandemic shopping habits by consumers has cooled demand for the service with the report noting the company had signed up a staggering 60 million US Prime members during 2020 and 2021 when shoppers moved online during the pandemic.
The Week Ahead
Domestic data this week is a bit light on with the Reserve Bank’s July meeting minutes released tomorrow and Westpac’s leading index on Wednesday.
Internationally, we get UK employment data, Eurozone CPI and US building permits and housing starts tomorrow, UK CPI and PPI on Wednesday, Japan trade balance and the ECB’s decision on interest rates where they are likely to raise rates for the first time in the current cycle on Thursday, and Japan CPI, UK retail sales and Eurozone services and manufacturing PMI’s on Friday.
Corporate reporting starts to ramp up with Q4 sales and production update from BHP and Q2 earnings from Johnson & Johnson tomorrow, and Q2 sales and production update from Woodside and Q2 earnings from Freeport McMoRan on Thursday.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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