31 January 2022 | Weekly Snapshot

Australian Share Market (ASX200) – down 2.62%, the third weekly decline in a row. Offshore leads were weak again with US S&P500 briefly following the Nasdaq into correction territory (a decline of at least 10%) before staging a late week rally. All ASX sectors were lower for the second week in a row although Consumer Staples (-0.04%), Utilities (-0.51%) and Energy (-1.77%) fell the least. Info Tech (-8.04%) led the declines again and is now down 5 weeks in a row. Materials (-3.05%) and Healthcare (-3.05% and also down 5 weeks in a row) were the next weakest as the P/E compression in the highest P/E sectors continued. The data highlight was the domestic Consumer Price Index data on Tuesday with the headline CPI rising +3.5% year on year in Q4, higher than +3.2% expected and up on Q3’s +3.0% increase. Trimmed mean inflation was +2.6%, also above consensus of +2.3% and well above Q3’s +2.1% increase and marked the first time that core inflation has moved above the RBA’s 2-3% target midpoint since mid-2014. The data seems to have crystalized expectations the RBA will end QE at its February policy meeting tomorrow, with attention now firmly on how and when central bank will tighten policy with markets now pricing in a May rate hike. That seems a bit too soon based on recent comments from the Reserve Bank of Australia and Governor Lowe may push back against notion of near term rate hikes given the desire to see wages growth above 3% and for inflation to be sustainably inside the 2-3% target range. Following the higher than expected CPI reading, Westpac brought forward their expectations for the first rate hike to August this year, while CBA is now expecting the first rate hike in November.

US Share Market (S&P 500) – up 0.77%, with the Dow (+1.34%) and Nasdaq (+0.01%) also higher after the Friday night rally erased the weekly losses and steadied the ship after one of the weakest starts to a new year on record. The Energy Sector (+5.01%) led the gains followed by Info Tech (+2.26%) and Financials (+1.32%). While Industrials (-1.47%), Utilities (-1.37%) and Consumer Discretionary (-0.97%) led the declines. US 2021 4Q GDP increased +6.9% last week, well ahead of the +5.3% rise expected and was the strongest end to a calendar year since 1984. The US economy ended the year in very strong shape and with a lot of momentum prior to the latest Omicron surge that seems to be having an impact on some short term economic indicators early in the New Year. Last week’s US Federal Reserve meeting was the main event. There was no change to rates but they did reduce asset purchases in line with expectations. The meeting statement said members expect that a rate hike “will soon be appropriate” given high inflation and the strong jobs market. The commentary was seen as leaning hawkish which may mean interest rate normalisation could start sooner and move faster than expected. This has been a key contributor to recent equity market weakness in early 2022, particularly in the highest P/E sectors. Q4’s earnings season was in focus last week with a third of S&P constituents now having reported. So far, the blended Q4 earnings growth rate is 24.3%, above the 21.4% expected at the end of the quarter and the fourth consecutive quarter of 20%+ earnings growth. While earnings have been coming in generally above consensus, the magnitude of the EPS beats overall has been below longer term averages. A larger than average percentage of reports have issued negative EPS guidance for Q1, and there has been a lot of management commentary around supply disruptions, higher input prices, and labour shortages but nothing really new there.

Portfolio Movements

Apple (AAPL) posts another record quarterly result The tech giant reported a US$34.6 billion profit for the first quarter, or US$2.10 per share, ahead of analysts’ expectations of US$1.90 per share, and exceeding the company’s previous best ever quarter a year earlier when it earned US$1.68 per share. First quarter revenue rose 11% to a record US$123.9 billion, also beating analysts’ expectations for US$119 billion. “Beats” were across the board with sales in every product category ahead of estimates except for iPad’s. Sales of Macs exceeded expectations by rising 25%, while iPad revenue declined 14%, missing projections for a 2.89% fall. An impressive result considering supply shortages hindered sales although Chief Executive Tim Cook said those constraints are improving. Supply chain issues featured prominently in the comments with Mr. Cook saying he reckons the company missed out on more than US$6 billion in sales during the October-December period.

Microsoft (MSFT) reports another blockbuster quarter. For their December quarter (Q2) total revenue jumped 20% year-on-year to US $51.7billion, ahead of consensus estimates of US$50.7billion. Operating profit jumped 24% to US$22.2 billion, and Net Income was US$18.8 billion, up 2% versus estimates of $17.5 billion or EPS of US$2.48 versus estimates of $2.32 per share. The biggest year-on-year growth for Microsoft was in the cloud computing segment. “Azure and other cloud services” grew revenue 46 per cent and was largely responsible for boosting overall cloud revenue to US$22.1bn, up 32%. Impressive numbers but the pace of Azure’s sales decelerated from the 50% rises regularly posted in recent quarters. In segment revenue the Intelligent Cloud division itself grew 6% to US$18.3 billion, the Productivity and Business Process unit was up 19% to US$15.9 billion and More Personal Computing (MPC) grew 15 per cent to $17.5 billion.

Johnson and Johnson (JNJ) sales rise, confirms plans to spin off consumer division. J&J posted sales of US$24.8 billion for Q4, compared with US$22.48 billion a year earlier. Its net earnings were US$4.74 billion, a rise from US$1.74 billion. Overall, higher sales from all three of J&J’s segments: Consumer health, Pharmaceuticals and Medical devices – contributed to a 10% rise in revenue. Adjusting for one-time items, J&J’s earnings per share was US$2.13, in line with estimates for adjusted EPS of US$2.12 and sales of US$25.28 billion. Chief Financial Officer Joseph Wolk did note supply constraints impacted J&J’s consumer health business, particularly skin-care products. Saying it was difficult to secure some raw materials, which limited the availability of certain products. J&J is gearing up to spin off the roughly US$15-billion a year consumer segment away from its prescription drug and medical device units. The move, aimed at separating businesses that require different strategies and expertise, will likely come in 2023 at the earliest. You could see this in the Q4 results with Pharmaceutical and Medical device sales growing more briskly, rising by 17% and 4% respectively, compared to the Consumer business where greater sales of Tylenol, digestive-health products and higher sales of beauty products helped grow revenue 1.1% higher year on year.

The Week Ahead

Domestic data this week includes Private Sector Credit today, RBA cash rate decision, retail sales and Manufacturing Index and Housing Finance tomorrow, and Construction Index Wednesday. Corporate results this week include Amcor 1H on Wednesday and Westpac Q1 Thursday.

Internationally, we have Eurozone GDP, and manufacturing PMI’s for France, Germany, Italy, the UK and the US tonight, Eurozone CPI tomorrow, US Job Openings Wednesday, Eurozone Services PMI’s and Bank of England rate decision Thursday, and US Durable goods on Friday. It’s another big week for corporate reporting with Google Q4 and Alibaba Q3 on Wednesday, Honeywell Q4 and Shell full year Thursday, and Amazon Q4 Friday.