21 August 2023 | Weekly Snapshot

Did you know?

New US mortgage rates hit a 21-year high last week. The average 30-year fixed-rate mortgage, the most popular home loan in the US, was 7.09%, up from 6.96% the week prior.

Market Movements

Australian Share Market (ASX 200) – down 2.62%. The Materials sector (-4.32%) led the declines followed by Financials (-3.61%) and Communication Services (-3.34%). REITs (+0.97%) and Healthcare (+0.96%) were the only sectors higher. Domestic equities faced mounting top-down macroeconomic headwinds last week, despite the bottom-up fundamentals from the full year reporting season being largely positive as the earnings season ramped up. The raft of weaker than expected data out of China recently weighed on our region and the Materials sector in particular last week with news that another Chinese property developer, Country Garden, was having troubles meeting their financial obligations. While in the US good news was bad news, with the better then expected economic data seeing bond yields rising and weighing on equity valuations that had moved back into expensive territory following 5 consecutive monthly gains for the S&P 500 and NASDAQ indices. The RBA August meeting minutes confirmed they now have a holding bias with members seeing a strong case to hold the cash rate at 4.10%. They noted the recent data is signalling the economy remains on the narrow path to a soft landing (their base case) and there is a credible path for inflation to return to target over time with the cash rate staying at its current level. They highlighted a significant slowdown in the rate of consumption growth and again noted the lagged effects of rate hikes are yet to fully play out. Slightly weaker than expected growth in the Q2 wage price index last week played into the RBA’s change of narrative, as did the weaker than expected jobs data. The Q2 wage price index was up 0.8% for the quarter and up 3.6% for the year, slightly below consensus for a 0.9% and 3.7% increase respectively. The July employment figures showed the number of people in work unexpectedly declined by 14.6K last month with the unemployment rate rising more than expected from 3.5% to 3.7%. The Aussie dollar fell to a 9-month low of 64 US cents on a less hawkish RBA, some weaker data, and concerns over the Chinese economy. Although early read through from the full year reporting season show a resilient domestic economy with consumers and businesses largely in good shape.

U.S. Share Market (S&P 500) – down 2.11%, with the Dow (-2.21%) and Nasdaq (-2.59%) also down on broad declines last week with every sector lower and the S&P 500 and Nasdaq both down for a third-straight week as the August decline continued. The economic data was again better than expected with a number of economists upgrading their Q3 GDP estimates last week, a notable reversal after calling for a Q3/4 recession just a few months ago. Retail sales for July were up a strong 0.7% for the month, well ahead of estimates for a 0.4% increase. The Philadelphia Fed’s August manufacturing index came in much stronger than expected at +12.0, well ahead of consensus for -10.0 and last month’s -13.5. Manufacturing has been a clear weak spot all year. It was the first positive read for this manufacturing index since August 2022 with the new-orders component jumping sharply into positive territory after 14 consecutive negative months. The NAHB Housing Market Index unexpectedly fell six points to 50 (consensus was for unchanged at 56), the lowest since May and snapping a seven-month run of gains with mortgage rate rising along with bond yields proving a headwind for homebuilder confidence. Bond yields rose further on the economic data with the US 10yr treasury yield taking out the October 2022 high last week to hit the highest since 2008, weighing further on expensive equity valuations particularly the high growth, high P/E cohort with the Nasdaq now down 7.36% for the month to date, more than double the Dow’s 2.98% month to date decline, although the NASDAQ is still up an impressive 27% in 2023. The big US retailers rounded out the Q2 reporting season with consumers holding up relatively well. With reporting season now largely done, it looks like the blended Q2 earnings growth rate will settle around a 4.9% year on year decline, better than the 7.0% decline expected at the beginning of the reporting season, with roughly 80% of companies beating consensus expectations, a 2 year high for that measure.

Portfolio Movements

Amcor (AMC) beats recently downgraded earnings – visibility improving. Amcor has reported full year results last week with Q4 adjusted EPS of $0.193 ahead of the $0.18 estimate, and Q4 adjusted EBIT of $436M also ahead of $415.5M expected. As previously guided volumes were ~7% lower than last year, which was partly offset by price/mix benefits of ~2%. Amcor CEO Ron Delia said “full year adjusted EBIT grew modestly in comparable constant currency terms and we returned $1.2 billion of cash to shareholders. After delivering earnings growth of 8% in the first half, demand softened considerably, and customer destocking persisted through the last two quarters of the year.” Adding “While we expect current market conditions to continue in the near-term, we have visibility to a number of controllable factors we believe will support a return to solid earnings growth in the second half of fiscal 2024 and leave us well placed to grow at our long term trend of high-single digit rates thereafter”.

National Australia Bank (NAB) provides Q3 update – announces $1.5 billion share buyback. NAB, our biggest business lender, reported an unaudited net profit of $1.75 billion for the June quarter, down from $1.85 billion reported a year ago, reflecting a modest deterioration in asset quality. CEO Ross McEwan said the third-quarter result was sound after a very strong first half outcome. “Our performance during these periods has benefited from the consistent and disciplined execution of our strategy, against a backdrop of higher interest rates but also slowing growth, inflationary pressures and elevated competition,” he said. “We know this environment is challenging for our customers, but pleasingly, most are proving resilient with only a modest deterioration in asset quality in 3Q.”. Unaudited cash earnings were $1.90 billion, up 5.8% on the same period last year. NAB also announced plans to buy back up to $1.5 billion of its shares with the buyback to begin in late August, subject to market conditions.

Sonic Healthcare (SHL) profit falls more than expected. Sonic Healthcare reported a larger than expected full year profit decline of 53% last week, with EBITDA down 41% to $1.68 billion in fiscal 2023 at constant exchange rates. Although the company lifted the final dividend to 62 cents, up from 60 cents last year in a sign of confidence in the base business. “Earnings and margins for the year were impacted by the dramatic reduction in Covid revenues, particularly in the second half,” Sonic said, with revenue from Covid services dropping by 80% to $478.2 million with costs to downsize that part of the business higher than expected. Annual revenue from its base business rose by 8.7% to $7.51 billion and Sonic expects an improvement in the current year. The company said it expected EBITDA to total between A$1.7 billion and A$1.8 billion for FY 2024.

The Week Ahead

There are no meaningful domestic economic data highlights this week although it is the biggest week of our reporting season with 84 ASX 200 companies reporting this week.

International highlights include China Foreign Direct Investment today and German PPI tonight. Tomorrow night is US Existing Home Sales with the global Markit Services, Manufacturing and Composite PMI’s out on Wednesday night along with US New Home Sales. Eurozone Consumer Confidence is Thursday night along with US Durable Goods Orders. Japan Tokyo CPI is Friday with German IFO Business Survey on Friday night. The highlight of the week will likely be Fed Chair Powells speech at the Jackson Hole 2023 Economic Policy Symposium on Saturday

Corporate reporting is in full swing this week with full year results from Charter Hall and Insurance Australia Group today. Full year results from BHP and first half results from Woodside tomorrow. Full year results from Woolworths and first half results from Santos on Wednesday. Full year results from South 32, Qube Holdings, and Ramsay Healthcare are Thursday. With Full year results from Wesfarmers on Friday.