2 May 2022 | Weekly Snapshot

Did you know?

The last time the Reserve Bank of Australia hiked interest rates was in November 2010 to a cycle high of 4.75%. Over the following 11 years the RBA has cut interest rates 18 times to the current cycle low of 0.10%. 

Market Movements

Australian Share Market (ASX200) – down 0.50% for the second week in a row on weak offshore leads but continues to outperform global peers year to date. The defensive undertones persist with sector gains led by Utilities (+1.30%), Industrials (+0.79%) and REITs (+0.67%). Info Tech (-1.68%) continues to struggle and led the declines again this week followed by Materials (-1.14%) and Energy (-1.04%). The highlight of the week was the Australian first quarter inflation data that came in higher than expected. Trimmed mean inflation, the Reserve Bank’s preferred measure, was up 3.7% year on year and above expectations of 3.4% and is now above the RBA’s 2-3% target band for first time since 2010. Headline inflation jumped to 5.1% from 3.5% in Q4 and was well above consensus estimates for a 4.6% rise. Inflation is rising for a number of reasons including as a consequence of the global monetary and fiscal policy responses to the pandemic that saw unprecedented increases in the money supply from Central Banks and Government spending. Following the data, markets brought forward the Reserve Bank’s tightening expectations with futures now fully pricing in an initial 15 basis point rate hike at this week’s RBA meeting tomorrow. The RBA would prefer to wait until June and stay out of the election campaign (the election is on 21 May) but the high inflation is putting them under pressure to act sooner. The 3-month bank bill swap rate isn’t waiting for the RBA with the short term reference rate jumping 31% last week to a new post pandemic high of 0.762% versus the current RBA cash rate of 0.10%.

US Share Market (S&P 500) – down 3.27%, with the Dow (-2.47%) and Nasdaq (-3.93%) also lower with a big selloff Friday night pushing the major indices into the red for the third week in a row. Every sector was lower with Materials (-0.82%), Info Tech (-1.26%) and Energy (-1.29%) falling the least. Consumer Discretionary (-7.89%) led the declines followed by REITs (-5.76%) and Financials (-4.59%). The initial first quarter GDP report showed a surprise contraction with a 1.4% seasonally adjusted annualised decline and much lower than the 1.1% growth expected. Strong demand trends remain although inventories and exports dragged. Exports probably not being helped by the surprising surge in the US dollar with the US dollar index hitting the highest levels since 2002. The first quarter earnings season continues to dominate the narrative with attention focused on big tech where earnings were mixed last week. Microsoft results were strong with their Cloud business which includes Azure going much better than expected and provided upgraded guidance for the current quarter. Alphabet revenue and earnings both missed with YouTube the main detractor. Cloud revenue and growth was better than expected and the company announced a US$70 billion buyback. Meta (Facebook) results were weaker and guidance disappointed. Amazon operating income missed and Q2 guidance was weaker than expected but AWS was stronger and is also benefitting from the positive cloud trends. Apple was a bit weaker after reporting record Q2 earnings and beating estimates but warned supply constraints will weigh on revenues in the current quarter and also authorized $90 billion in share repurchases.

Portfolio Movements

CME Group (CME) posts healthy Q1 beat. CME Group’s first quarter earnings rose by 24% on robust growth in trading volumes of options and other financial contracts with the company benefiting from a volatile quarter for markets as customers look to hedge their equity and interest rate risks. Revenue rose 7.4% to $1.35 bill that was higher than the $1.33 bill expected. Average daily volumes were up 19% from the previous quarter with record Equity Index volumes up 30% year on year. The Chicago exchange operator said net income rose to $711 million, or $1.95 a share, from $574.4 million, or $1.60 a share, a year earlier. Excluding certain items, CME posted adjusted earnings of $2.11 a share. Clearing and transaction fees came in at $1.14 bill vs estimates of $1.12 bill. Market data and information services came in at $151.7 mill vs estimates of $145.4 mill. “During this period of extreme geopolitical and economic uncertainty, our continued focus on helping clients manage their risk resulted in strong earnings and revenue growth during the first quarter,” CME Group CEO Terry Duffy said.

Amazon (AMZN) Q1 sales growth slows – guides lower for Q2. Amazon reported Q1 results with revenue growth of 7% in the first quarter which is its slowest growth in about two decades but comes after a period of phenomenal growth due to a surge in online orders due to the pandemic. Sales increased to $116.44 billion (largely in line with analysts’ expectations) from $108.52 billion in the year-ago quarter, when sales jumped a massive 44%. Amazon said sales at its cloud-computing service increased 37% and roughly in-line with what analysts expected. Amazon Web Services is the leading cloud-computing service for businesses around the world and has expanded at a rapid pace with the unit continuing to stand out as a strong profit generator. But the guidance for the current quarter has disappointed with Amazon projecting sales of between $116 billion and $121 billion which is below the $125.33 billion in sales that analysts were expecting. “The pandemic and subsequent war in Ukraine have brought unusual growth and challenges,” said Andy Jassy, Amazon CEO. “as we work through ongoing inflationary and supply chain pressures we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020.”

Honeywell (HON) beats Q1 estimates, upgrades guidance. Honeywell has produced a strong Q1 with revenue of $8.38 bill ahead of the $8.28 bill expected. EPS of $1.64 and adjusted EPS of $1.91 also exceeding the high end of guidance range. Sales were down 1% year on year but organic sales grew 1%, or 3% excluding the impact of lower COVID mask volumes. “Honeywell delivered a strong start to 2022, meeting or exceeding expectations in the first quarter despite considerable new macroeconomic challenges and the ongoing impact of supply chain constraints,” said CEO Darius Adamczyk. Aerospace sales led the beat as the sector bounces back with first quarter sales up 5% year over year on an organic basis as both the air transport aftermarket and business and general aviation aftermarket sales grew by over 25%. Full year guidance for 2022 was upgraded to EPS in the $8.50-$8.80 range vs prior guidance of $8.40-$8.70.

The Week Ahead

The domestic data this week includes the AIG manufacturing index today, the RBA meeting tomorrow where a majority of economists are now tipping a rate rise, the AIG construction index, housing finance and retail sales are due Wednesday, building approvals Thursday and the AIG services index on Friday.

Internationally we have Eurozone consumer, economic and services confidence indicators and US manufacturing PMI tonight, US ISM manufacturing and construction spending and Eurozone unemployment rate and PPI tomorrow, US durable goods and factory orders, job openings and services PMI, Eurozone composite and services PMIs and retail sales out Wednesday, The US Federal Reserve meeting on Thursday will be the highlight of the week with another interest rate hike expected, with the Bank of England also meeting, Friday night is another big datapoint with US nonfarm payrolls and unemployment rate.

For corporate reporting it is another big week. We have Transurban investor day today, Woolworths Q3 update tomorrow, Amcor Q3, CVS Health Q1 and ANZ first half results Wednesday, NAB first half results and Shell Q1 Thursday, and Macquarie full year earnings on Friday. There are another 160 S&P500 companies also reporting earnings this week.

Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice

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