26 JUN 2023 – Monday Market Highlights – Transcript

Good morning, it’s Monday 26th June and I’m Brendan from Milford Asset Management.

After weeks of extremely buoyant markets, US stocks witnessed their worst weekly decline in 3 months last week, with the S&P500 falling 1.4% and the Nasdaq falling 2.5%. This was driven largely by hawkish rhetoric from a number of central bankers, including Powell himself.

On Wednesday, Federal Reserve Chair Powell testified before the house financial services committee, and the overwhelming tone was that more work is required to resolve the inflationary issues in the US. He outlined that nearly all FOMC participants expect to raise interest rates further by the end of the year, inline with projections the prior week at the FOMC meeting, yet still resulting in a negative reaction from market participants.
Continuing on the central bank front, the key event of the week was the Bank of England interest rate decision. The committee decided to surprise the market and reaccelerate the pace of rate hikes, stepping up to a 50bp hike from 25bp at the prior meeting. Ultimately the rationale for doing this is clear – the employment market remains extremely tight and core inflation is accelerating.
On the UK inflation front, we got the May release a day before the bank of England decision. This outlined that despite softness in non-core elements, non-energy goods and services inflation accelerated so that headline CPI remained unchanged at 8.7%. Worryingly, core inflation accelerated to 7.1% from 6.8%, and within that, service inflation spiked from 6.9% to 7.4%. The breadth of inflation beats at the sub-category level was obviously very concerning for the bank of England, hence their decision to reaccelerate the pace of rate increases.
Elsewhere in economic news, we received the RBA minutes for the June board meeting. Despite hiking at the most recent meeting, the minutes were more dovish than expected, outlining that the decision was ‘finely balanced. Additionally, officials removed the explicit forward guidance from the prior meeting that noted further increases in interest rates may still be required.
We also received flash PMI data in Europe last week, which outlined a slowdown in business activity. The eurozone composite PMI fell to 50.3 from 52.8, materially below the 52.5 consensus expectation and only just above contractionary levels. Looking into country specific detail, German PMIs fell to 50.8 from 53.9, and France sunk to 47.3 from 51.2. This is no doubt concerning, and has sparked renewed recession fears across Europe.
In equity news:

Flight centre hosted their leisure strategy day, which reaffirmed a profit before tax margin target of 2% and noted that they were not seeing any sings of slowing, in contrast to several recent retailer downgrades in Australia. Despite this, the market interpreted the lack of an upgrade and the comment that ‘conditions were normalizing’ negatively, and the stock sunk 6.9% on the day.
Fletcher building hosted their investor day last week, where they reaffirmed FY23 EBIT guidance at $800m and FY24 volume decline of 8% vs FY23. They key question the market still has is around whether or not fletcher building can retain margin through FY24 while volumes are declining.
Gold road gave a production update last week and cut 2023 production to 320-350,000 ounces from 340-370,000 ounces. Production has been impacted by lower productivity of drill, the lack of availability in blasting resources and poor weather conditions.
Transport technology company, EROAD, was the best performer on the NZX last week, rising 58% on the back of a takeover proposal by a subsidiary of Constellation Software. The deal values EROAD at $147m, which was a 77% premium to the last closing price prior to the offer.
In the week ahead

We will be watching the Australian CPI data for May to get a steer on future RBA policy. The prior reading was an acceleration to 6.8% from 6.3%, while consensus for this reading is a decline back to 6.1%.
We also get a read on inflation in europe, which will be interesting given the recent softness in activity data.
We will also be watching personal income and spending in the US for a steer on the health of the consumer, as well as PCE which is the Fed’s preferred measure of inflation.

Thanks for listening, we will see you again next week.