The jobless rate in Australia’s most populous state, NSW, fell to 2.9% last week and the lowest since monthly records began in 1978. Only 135,000 people were unemployed in NSW out of a population of 8.18 million.
Australian Share Market (ASX 200) – up 0.15% consolidating the prior week’s strong bounce from the 3-month low to a 1 month high. Offshore leads were mostly positive with notable outperformance from the value cohort of equities last week. The Financials sector (+2.68%) led the gains with Banks the best performers for the week, followed by Energy (+1.16%) and Health Care (1.14%). The Materials sector (-2.45%) led the declines followed by telecoms (-2.3%) and Info Tech (-0.53%). US Equities were higher last week led by Banks whose share prices were still languishing from the banking crisis in March as Q2 earnings reports and outlooks came in better than expected. The Dow was up 10 straight sessions by the end of the week, the longest streak since 2017. Tech (growth) is still strong after rallying over the past 6 months, but there have been signs that the value cohort could be making a comeback which could come from reduced recession risks with Goldman Sachs the latest to cut their US recession odds last week. While focus was mainly on the US Q2 reporting, Australian jobs growth in June was stronger than expected again last week with 32.6K jobs added, double the 15K gain expected. The unemployment rate held steady at 3.5%, lower than the 3.6% expected after last month’s figure was revised down from 3.6% to 3.5%. These are still around the lowest unemployment rates in 50 years while the unemployment rate in NSW fell to a record low of 2.9%. This is starting to get tricky for the RBA now as unemployment still at multi decade lows after one of the most aggressive rate hiking cycles on record is stronger than expected. Meanwhile, corporate insolvencies have risen to pre-pandemic highs according to ASIC data also last week which showed corporate insolvencies rose 62% in FY2023 to 7943, the highest since FY2019. Odds for an August rate hike increased following the strong employment figures, but the balancing act of keeping the economy on an even keel seems to be getting more complicated, although our Q2 CPI data due Wednesday should provide further insights.
U.S. Share Market (S&P 500) – up 0.69%, with the Dow (+2.08%), and Nasdaq (-0.57%) mixed. Economic data last week was Ok with June retail sales up 0.2% for the month, not as high as expected but the prior month revised higher (from 0.3% to 0.5%). The July NAHB Housing Market Index rose one point to 56, in line with expectations, the seventh-straight monthly increase and the highest since June 2202 although high mortgage rates remain a headwind according to the report. Housing starts and building permits missed estimates after housing data has surprised to the upside for most of this year but were coming off very strong gains last month with the blowout 21.7% monthly increase in housing starts reported last month revised down to a still strong 15.7% monthly increase while the weekly initial jobless claims fell to the lowest in 2 months with bond yields rising late in the week. With value stocks outperforming last week, growth stocks were under a bit of pressure with a big test coming as Q2 tech earnings reports are due and a bit of profit taking in those names ahead of that late last week by the looks of things. The recently named “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms) are responsible for 73% of the S&P 500 gains in the first half of 2023, each up 90% in 6 months on average with share price gains that will need to be supported by earnings to some extent. By the end of the week 18% of S&P 500 companies had reported Q2 results with the blended annual earnings decline now at -9.0%, down further from -7.1% last week, and below the 7% decline expected at the end of Q2. The forward 12-month P/E ratio for the S&P 500 is currently 19.5 and looks on the expensive side, above the 5-year average of 18.6 and above the 10-year average of 17.4. It is a busy week ahead with 166 S&P 500 companies (including 12 Dow components) reporting this week with central banks also in focus with meetings from both the Federal Reserve and ECB, both currently expected to raise rates by 25 basis points this week.
Bank of America (BAC) reported Q2 EPS of $0.88 last week, ahead of the $0.84. Net charge offs, non-performing loans and provisions for losses were all lower than expected. They also guided for Q3 net interest income in the $14.2-14.3B range, ahead of the $14.04B estimates. BofA said consumers are still in a pretty healthy place and spending more money, while charge-offs are still well below pandemic levels. Broader themes from the last week’s Bank reporting included JPMorgan noting consumers in good shape and still spending down excess cash and that low borrowing levels and elevated house prices provide key cushions. Citi said it sees US consumer as resilient with behaviour more cautionary than recessionary. And Wells Fargo noted strong credit quality and healthy consumer balance sheets.
Johnson & Johnson (JNJ) led the market higher last week with Q2 EPS of $2.80 ex-items ahead of the $2.62 expected. Revenue of $25.53B was also ahead of the $24.63B expected. Full year guidance was upgraded to EPS of $10.70-10.80 from $10.60-10.70 and FY revenue for $99.3-100.3B vs prior guidance $97.9-98.9B. The better-than-expected result was largely due to strong sales growth from the company’s medtech business. The medtech division provides devices for surgeries, orthopaedics and vision with the company benefiting from a rebound in demand for nonurgent surgeries from older people who delayed procedures during the pandemic. The full-year guidance includes results from J&J’s consumer health business, which was spun out as an independent company (Kenvue) in May with a current market cap around $50B. J&J still owns nearly 90% of Kenvue and plans to reduce its stake through an exchange offer that could launch “as early as the coming days,” according to J&J CFO Joseph Wolk on the analyst call.
Schlumberger (SLB) is the world’s largest offshore oilfield services company. They reported Q2 EPS of $0.72 ex-items on Friday, up 44% year on year that was largely in line with the $0.71 expected. Revenue of $8.10 billion was up 20% year on year. SLB CEO Olivier Le Peuch commented, “I am very pleased with our second-quarter results, which reflect significant growth in the international markets. As the upcycle continues to unfold, we are excited about the opportunities for our business, with international- and offshore-led growth fuelling strong pretax segment operating margin expansion and cash flows as highlighted in this quarter’s results”. Adding, “This is a compelling environment for our industry” and “As international spending builds further momentum in H2 of 2023 and North America moderates as anticipated, this cycle continues to align closely with SLB’s strengths, affirming our confidence in our full-year financial ambitions.”
The Week Ahead
Domestic economic highlights this week include the Q2 CPI data on Wednesday where Annual growth in both headline and trimmed mean inflation is expected to slow to 6.2% and 6.0% respectively, down from 7% and 6.6% in Q1. The Producer Price Index is on Friday as are Retail Sales where monthly growth is expected to slow from last month’s 0.7% increase.
International highlights include the Markit Manufacturing and Services PMI’s in Europe, the UK, and US tonight. Tomorrow night is German IFO Business Survey and US FHFA Home Price Index and Consumer Confidence. Wednesday night has US New Home Sales and the highlight of the week – The Federal Reserve FOMC meeting where they are expected to hike rates another 25 basis points. Thursday night the European Central Bank is also expected to hike rates another 25 basis points, followed by US Durable Goods, the first read of Q2 GDP, Wholesale Inventories, and Pending Home Sales. Friday is another key night with US Employment Cost Index for Q2 and the monthly Personal Consumption Expenditure
Corporate reporting is in full swing with S32 Q4 update today and Linde AGM tonight. Verizon Q2 is tomorrow night, with Microsoft Q4, Google Q2, Rio Tinto 1H, Lloyds 1H, CME Q2 and Thermo Fischer Q2 all on Wednesday. Thursday has Macquarie AGM, Linde Q2, and Shell 1H results.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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