The US economy surged to an annualized growth rate of 4.9% in the third quarter of 2023 at the first estimate, much stronger than expected and the highest growth rate since late 2021.
Australian Share Market (ASX 200) – down 1.07% and the 5th down week out of the last 6. Offshore leads were weak despite some US Q3 earnings and US Q3 GDP coming in better than expected with geopolitical tensions remaining elevated. Utilities (+1.73%) and Materials (+0.87%) were the only sectors higher, while REITs (4.38%), Info Tech (3.71%), and Telecoms (2.46%) led the declines. The gold price was higher last week on the increased geopolitical risks. And while the 10yr US Treasury yield pulled back from the recent 2007 highs, our 3yr and 10yr yields rose further to 12-year highs last week. Our yields rose on the Q3 CPI data, which was higher than expected last week rising 1.2% for the quarter, above the 1.1% estimate. Annual CPI of 5.4% was ahead of the 5.3% estimate but still down from the 6.0% rate last month. The trimmed mean was also above expectations with price rises still broad based driven mainly by auto fuel, rents, owner-occupied new dwellings, and electricity last month. The new monthly data showed the inflation indicator up 5.6% for the year in September, also ahead of the 5.4% estimate and up from last month’s 5.2%, with that annual inflation rate now increasing again for the 2nd month in a row. Market pricing moved to a 100% chance of another rate hike by year’s end following the data, despite the RBA stating the last couple of months that inflation should fall back to target without additional rate hikes. With inflation picking back up here after 400 basis points of RBA rate hikes, and US GDP growth reaccelerating after 500 basis points of Federal Reserve rate hikes, there are questions as to whether merely raising rates is sufficient to curb inflation. Increasingly, it appears the issue is the “amount” of money, rather than the “price” of money (ie, interest rates). Central banks increased the money supply by 30%-40% during the Covid panic and have been very slow to get it back down, with economies and prices seemingly still rising into the increased money supply.
U.S. Share Market (S&P 500) – down 2.53%, with the Dow (-2.14%), and Nasdaq (-2.62%) also lower for the 2nd week in a row. It was a big week for Q3 earnings with around 160 S&P 500 companies reporting. From the 49% of S&P 500 companies that have now reported, the blended annual earnings growth rate for Q3 S&P 500 EPS is now +2.7%, well ahead of the 0.3% earnings decline expected at the beginning of the quarter. Bonds were volatile with the 10yr US Treasury yield surging to a new high early in the week before easing back with 5% on the 10yr likely a key level at which point upside and downside risks on a medium-term basis are better balanced. Economic data was again stronger than expected. The Markit Flash US Manufacturing PMI for October was up 0.2 points last week to 50.0, ahead of the 49.5 expected and a six-month high. The report noted demand conditions for goods producers drove the expansion on strong new orders, which rose at the fastest pace in over a year as the steady improvement in manufacturing indicators of recent months continues. New home sales were up 12.3% for the month to a 759K Seasonally Adjusted Annual Rate, well ahead of estimates for a 680K SAAR and fastest pace in 19 months, bucking the recent trend of softer housing indicators the last month or so, after housing had staged a strong recovery in the first half of the year. The first estimate of US GDP for Q3 came in at 4.9% annualised last week, well above consensus for 3.8% that had been revised higher throughout the quarter and was the strongest growth since Q4 2021 with the economy clearly carrying some momentum into years end. Since late last year and for most of this year, growth in Q3 had been expected to be negative and the start of recession with those estimates proving to be well off the mark. Despite the better-than-expected earnings and economic data, markets remained anxious last week over the situation in the Middle East although the oil price pulled back from elevated levels the week prior.
CME Group (CME) reports in line Q3 results. CME reported Q3 EPS $2.25 ex items last week, largely in line with expectations, up 13% on Q3 last year and was CME’s 9th consecutive quarter of double-digit EPS growth. Q3 revenue of $1.34B grew 9% for the year and was also in line with expectations.
Q3 average daily volume (ADV) was 22.3M contracts. Non-U.S. ADV reached 6.5M contracts, up 7%, including 16% growth in interest rates and double-digit growth across agricultural, energy and metals products. “We are operating in an environment that unquestionably requires risk management with so much uncertainty in the world we live in,” and “Regardless of whether rates rise, fall or hold steady, the shape of the yield curve and interest-rate views continue to shift, and our customers need to manage that risk,” said CEO Terry Duffy.
Microsoft (MSFT) beats Q1 estimates – strong margin improvement. Microsoft reported a decent beat last week with Q1 EPS of $2.99 well ahead of the $2.65 expected with net income up 27% on this time last year. Revenue of $56.52 billion was also ahead of the $54.50 billion expected. Spending cuts and the Azure cloud growth have combined to increase profit margins with Azure revenue growth +29% for the year, ahead of the +26.4% expected. Microsoft is “still helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage,” CEO Satya Nadella said in the earnings release. The Productivity and Business Processes unit reported $18.59 billion in revenue, up 13% and ahead of $18.19 billion estimate. This unit contains Microsoft 365 productivity app subscriptions, LinkedIn and Dynamics enterprise software with the Teams app now having over 320 million monthly active users, up from 300 million six months ago.
Verizon (VZ) beats Q3 estimates, upgrades full year free cash flow guidance. A stronger than expected report from telco giant Verizon last week saw the stock up 9% and it biggest daily gain in 15 years. Q3 EPS of $1.22 ex-items was ahead of the $1.18 expected. Revenue of $33.3B was largely in line. They reaffirmed FY EPS guidance in the EPS $4.55-4.85 with estimates at the lower end of that range ahead of the report and upgraded free cash flow guidance to above $18B, a $1B increase from the previous guidance. And added another 100K postpaid phone customers during the quarter, ahead of the 62K expected. CEO Hans Vestberg said, “We continued to make steady progress in the third quarter with a clear focus on growing wireless service revenue, delivering healthy consolidated adjusted EBITDA, and increasing free cash flow.”
The Week Ahead
Domestic economic data highlights this week include Retail Sales today, Private Sector Credit tomorrow, Building Approvals Wednesday, and Housing Finance Thursday.
International highlights include Eurozone Business Climate and German CPI tonight. China PMI’s and Bank of Japan rates decision are tomorrow. Eurozone Q3 GDP is tomorrow night along with US Q3 Employment Cost Index, FHFA Home Price Index, Chicago PMI and Consumer Confidence. US Construction Spending, ISM Manufacturing, JOLTS Job Openings, and the FOMC rates decision are all Wednesday night. Thursday has the Bank of England rates decision, US Unit Labour Costs, Productivity, and Factry Orders. Friday night is Eurozone Unemployment Rate and US Non-Farm Payrolls.
Portfolio company reporting this week includes Amcor Q1 and CVS Q3 earnings and BHP Annual General Meeting on Wednesday. Novo Q3 is Thursday along with Shell Q3 and Apple Q4 with Macquarie first half on Friday.
The US Q3 earnings season ramps up further this week with another 162 S&P 500 companies (including 4 Dow 30 components) due to report.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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