7 August 2023 | Weekly Snapshot

Did you know?

Fitch Ratings downgrading the U.S. long-term credit rating from AAA to AA+ last week marked the second time in history since the SEC recognized these ratings as standards in 1975 that a major credit-rating agency downgraded the United States. The first time was by Standard & Poor’s in 2011.

Market Movements

Australian Share Market (ASX 200) – down 1.06% and snapping a 3-week winning streak. Consumer Discretionary (+0.77%) was the only sector higher while Utilities (-3.41%), Financials (-1.72%) and Health Care (-1.34%) led the declines. Offshore leads were lower with August off to a weak start following the strong July and year to date performance. For the S&P 500 and Nasdaq July was the 5th monthly gain in a row with the S&P 500 having its 10th best year to date on record. The rally had left US equities looking fully valued with the forward 12-month P/E ratio for the S&P 500 at 19.2, above medium- and longer-term averages. The US 10 yr. bond yield rose to a new year to date high of 4.18% last week not really fitting with the disinflation narrative that has been one of the drivers of this year’s equities rebound. And ratings agency Fitch downgrading the US credit rating from AAA to AA+ also weighed after they had put the US on ratings watch back in May during the debt ceiling fight. The downgrade flagged “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers”. The domestic highlight was the RBA leaving the cash rate unchanged at 4.10% last week in line with market pricing with the decision to provide time to assess the impact of past rate hikes and economic outlook uncertainties, but reiterated some further tightening may be required. They provided updated forecasts for inflation to decline to 3.25% by the end of next year and pushed out the return to the 2-3% target into late 2025. While current inflation is still too high the RBA said recent data is consistent with inflation returning to target over the forecast horizon. Markets are now pricing in less than a 25% chance of a September rate hike, while the odds of any further tightening fell to ~60% following the decision with several commentators calling the end of the hiking cycle and for rate cuts to begin next year.

U.S. Share Market (S&P 500) – down 2.27%, with the Dow (-1.11%) and Nasdaq (-2.85%) also lower. It was a key week for Jobs data with the JOLTS jobs openings report last week showing job openings falling more than expected to 9,582K, below the 9,700K forecast but remain historically high while Friday night’s July nonfarm payrolls report was largely in line with expectations. Another 187K jobs were added during the month, the lowest monthly increase since December 2020 and slightly below the consensus for 200K, although the unemployment rate was down 0.1% to 3.5%, better than consensus for 3.6%. Other data was Ok with the July ISM manufacturing coming in at 46.4, a bit lower than the 46.9 expected but improving on last month’s 46.0 with signs of stabilization rather than further deterioration following nine straight months in contraction territory. The July ISM Services down 1.2 points for the month to 52.7 and a slight miss from the 53.0 expected but still firmly in expansion territory and the weekly unemployment claims remained around the lowest since early this year. It was another big week of earnings with 84% of S&P 500 companies have now reported Q2 earnings, and 79% of these have reported actual EPS above the mean EPS estimate, which is above the 5-year average of 77% and above the 10-year average of 73%. The blended (year-over-year) earnings decline for the S&P 500 is currently sitting -5.2%, compared to the earnings decline of -7.4% the week prior and expected earnings decline of -7.0% at the end of the second quarter, on June 30. Positive earnings surprises reported by companies in multiple sectors last week (led by the Consumer Discretionary, Health Care, and Information Technology sectors) were responsible for the decrease in the overall earnings decline. In light of the recent better than expected earnings and economic data, JP Morgan was the latest investment house to scrap their US recession call last week. Like many others the Bank had said they expect a recession to begin this year but now see a continued expansion instead, and “modest, sub-par growth” in 2024 as the most likely scenario.

Portfolio Movements

Amazon (AMZN) smashes Q2 estimates – upgrades Q3 guidance. Amazon reported a big beat last week with Q2 EPS of $0.65 way ahead of the $0.35 expected. Cost-cutting efforts from last year are beginning to bear fruit, as did their recent “Prime Day” in July which was its biggest ever in terms of number of products sold, and AWS growth stabilized as customers started shifting from cost optimization to new workload deployment. The company also upgraded Q3 revenue guidance to between $138 billion and $143 billion, or growth between 9% and 13%, ahead of expectations for revenue of $138.25 billion. “It was another strong quarter of progress for Amazon,” said Andy Jassy, Amazon CEO. “We continued lowering our cost to serve in our fulfillment network, while also providing Prime customers with the fastest delivery speeds we’ve ever recorded, and AWS has continued to add to its meaningful leadership position in the cloud with a slew of generative AI releases.”

CVS Health (CVS) beats estimates – upgrades FY revenue guidance. CVS Health reported Q2 EPS of $2.21 ex-items last week, ahead of the $2.12 estimate with total revenues increasing to $88.9 billion, up 10.3% compared to prior year. They reaffirmed full year EPS guidance in the range of $8.50 to $8.70 ex-items but increased FY23 revenue guidance to a $350.5-356.3B range vs estimates for $347.7-353.5B. During the second quarter the Company developed an enterprise-wide restructuring plan intended to streamline and simplify the organization, improve efficiency and reduce costs. In connection with the development of this plan and the recently completed acquisitions of Signify Health and Oak Street Health. In connection with the restructuring plan, during the three months ended June 30, 2023, the Company recorded a $496 million pre-tax restructuring charge with the restructuring program is expected to be substantially complete by the end of 2023.

Diageo (DGE) reported strong but in line FY results last week with EPS growing 7.6% to 163.5p ex-items vs consensus of 164.1p. Full Year revenue grew 10.7% to £17.11B vs consensus of £17.22B and the company announced a new return of capital programme of up to $1 billion. Growth in organic net sales was delivered across most categories, particularly in the three largest categories: scotch, tequila, and beer. New CEO Debra Crew said “We have delivered strong fiscal 23 full-year results, with organic net sales growth of 6% and organic operating profit growth of 7%, both within our medium-term guidance. We expanded organic operating margin by 15 basis points in a challenging cost environment while continuing to invest in the business. These results demonstrate Diageo’s ability to consistently deliver resilient performance, even in challenging macro environments.”

The Week Ahead

Domestic economic highlights this week include Westpac Consumer Confidence and NAB Business Survey’s tomorrow and Consumer Inflation Expectations Thursday.

International highlights include German Industrial Production, Eurozone Sentix Economic Index, and US Consumer Credit tonight. China New Loans, Loan Growth and Trade Balance are tomorrow, along with Japan Household Income, Consumption and Expenditure and US NFIB Small Business Index. China CPI and PPI are Wednesday with the highlight of the week being the US CPI data on Thursday night with the annual headline inflation expected to rise from 3% in June, to 3.3% in July. UK Q2 GDP and Industrial Production is Friday night along with US PPI and University of Michigan Consumer Sentiment

Corporate reporting shifts from international to domestic this week as our first half reporting season gets underway with full year results from CBA and Sony Q1 on Wednesday, and Novo Nordisk Q2 on Thursday.