1 MAY 2023 – Monday Market Highlights – Transcript

Will McVeagh
Good morning, it’s Monday the 1st of May and I’m Will from Milford.

Inflation data released in Australia last week showed the annual pace of price rises slowing, with headline CPI dropping from 7.8% in the December quarter to 7% in March. While this print was higher than expectations, core CPI was slightly lower, coming in at 1.2% quarter on quarter. Key to this was a change in the underlying components with goods inflation falling from 9.5% to 7.6% while services inflation increased from 5.5% to 6.1%.  this is to be expected as supply chains have eased, and consumers demand for goods dropped as they can get out and consume services post restrictions easing. More interesting will be the pattern of services inflation, as this is often more sticky than goods inflation which will be key for the interest rates path going forward. As we cycle previous year price rises, it’s expected we will see a rapid fall in headline inflation as one-off rises such as energy price jumps post the Ukraine invasion roll off. The big unknown however is that while these factors will see inflation fall back from record levels, will they be enough to get back to the RBAs 2-3% target band.

The other key focus for the market was the US company earnings season, which saw a number of the mega cap tech companies report results last week. AMZN, META, MSFT and GOOGL all delivered very strong results, smashing street estimates and dragging the broader index higher. Market breadth, which measures the number of stocks in an index that move in the same direction as the broader index, has been extremely poor in recent months. Basically, this means that the large tech index weights have been strong, and everything else has been weak. Post these results this dispersion has gotten even more pronounced, which some believe signals vulnerability in the index.

Also reporting was US regional bank, First Republic. After a number of weeks of relative calm post the Silicon valley and Signature bank collapse, news reports signalled that FRC was looking to raise capital as part of a rescue plan post larger than expected deposit outflows at its 1st quarter result. However, this appeared to fail over the weekend as the US Federal Deposit Insurance Corporation took steps to place FRC into receivership with the stock falling over 75% over last week.

In domestic company news Australian Vitamins company, Blackmores, received a takeover offer from Japanese beer giant Kirin which valued the company as $1.8B. The offer at $95 was a 24% premium to previous close and saw the largest shareholder, Marcus Blackmore agree to tip in his 25% stake to Kirin. Unlike a number of indicative deals we have seen in Australia in recent times, this is a binding deal which should be wrapped up fairly quickly. There is a number of regulatory approvals to gain, however it is unlikely these should pose any issues and should see the deal close sometime in August.

NZ milk company Synlait downgraded guidance to a mid point of effectively nil NPAT, as the company flagged slowing demand from consumer-packaged infant formula customers, which the market thought could potentially be A2 Milk. Post this announcement A2M updated the market that there was no material change to their outlook, but that revenue expectations would be at the bottom end of guidance.  SML was down 27% on the day, while A2M was off 5%.

Coles reported 3rd quarter sales growth of 7% in supermarkets, and 2.6% in liquor last week. The supermarket giant flagged improving supply chains, expansion of their dropped and locked value campaign, and commencement of the MasterChef promotion as providing tailwinds. However it does appear that supermarket price inflation is easing which may provide a headwind for further margin expansion. One key driver of the drop in inflation appears to be the improved weather conditions, providing a more positive environment for fresh fruit and veges.

This week central banks will be the key focus with the RBA and FOMC both meeting and delivering rate decisions.

The rates market is not expecting the RBA to raise rates tomorrow with almost no hike priced. Some economists do however expect a hike after the RBA paused in April to assess conditions and a run of robust data. The path forward remains unclear for the Australian central bank as their current policy rate is a way below other developed peers with inflation remaining high. However with a large number of fixed rate mortgages rolling off in the next 3 months, it is expected that consumption spending will slow markedly and lead to inflation cooling. The big risk for the RBA, is that while they wait for this to flow through spending may pick up again, which would lead to a reacceleration in rate hikes later in the year.

When the FOMC meet on Wednesday the market has priced a 80% chance of a 25bp rate hike, to take the target fed funds rate to 5.25%. Based on current market pricing it is expected that this will be the last rate hike in the cycle, however plenty of uncertainties remain. The Q&A after the announcement will be of particular interest to see what Fed chair Powell is thinking the path forward from here looks like. Many rates markets globally have rate cuts priced for later this year, as recession hits, however most central banks have pushed back firmly on this rhetoric.

Have a good week, thanks for listening.