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Good Morning, it’s Monday the 3rd of July and I’m Will from Milford.

Markets were quiet last week for the end of financial year, as the northern hemisphere head into their summer holidays. Expect to see lower volumes and news releases over the next month offshore, which inevitably has a flow on effect down to our part of the world.

May Australian CPI released last week surprised the market to the downside coming in at 5.6% vs a market expectation of 6.1%, following a print of 6.8% in April. While this is welcome news for many consumers and the RBA who are struggling with the impacts of high inflation, this does need to be treated with some caution. When we look at the core measure, which excludes volatile items such as fruit, veges, fuel and holiday travel, inflation actually increased 0.5% in May, and the annual measure only fell very marginally. Rents will continue to be of concern with another strong rise of 0.8% mom, while other services categories such as insurance were also robust. On the flipside, the big drop in this data set was the 11.3% mom fall in holiday travel and accommodation, in signs that consumers are less willing to pay exorbitant prices for getaways!

In contrast to the weak CPI print, May retail sales came in very strong increasing 0.7% in May, a big beat to the 0.1% expected. The ABS noted that they had seen a surprising jump in sales mainly driven by larger than usual discounting and promotion events, which consumers are drawn to in response to cost of living pressures. Other retailing led the jump which includes online-only retailers, florists, and pharmaceuticals. Also worth noting was the strong bounce back in people eating out in May after a fall in the month prior. When coupled with the CPI data released the day before it shows a murky picture for the Australian economy that will be hard for the RBA to interpret.

In stock news last week, Australian fast food operator, Collins Foods reported strong sales numbers at their full year results presentation on Tuesday. Collins owns and runs KFC, Taco Bell and Sizzler restaurants both in Australia and abroad. Key division, KFC Australia saw sales up 5.8% in FY23, with the group pointing to accelerating 8.8% growth in the first 7 weeks of this financial year. This seems to be driven by flat volumes, but increased ability to push through price rises to consumers. Management flagged further positives as input prices have slowed or even starting to fall in key ingredients such as chicken, chips and oil. Many expect Collins to be well positioned in a downturn, as KFC provides very good value for money when compared to other competitors, as consumers look for value options as cost of living pressures bite. Inventors had been nervous heading into this result, which saw the stock soar up 18% on the day and 25% on the week after the solid result.

Adding to the list of recent downgrades by retailers, Harvey Norman joined the club on Wednesday. They provided a update to the market flagging expected profit before adjustments of $670m, a 5% downgrade to consensus. The release was brief and didn’t give an update on the outlook which the market will be keen to understand. Interestingly, the stock rallied 5% of the day.

A similar theme can be seen offshore, where we saw large US retailers, Wallgreens boot alliance and Nike report updates last week. Wallgreens, a large US pharmacy chain, said they were seeing shoppers becoming more cautious and spending more on value product, resulting in a drop in earnings and forecasts. Nike meanwhile, has faced issues with excess inventory that they are having to sell at discounts, hitting margins. The sportswear giant does expect to grow revenue by mid single digits this year, however this did little to impress investors, with the stock selling off after results.

Looking ahead the key focus this week will be the RBA decision tomorrow. The market continues to struggle to price the RBA, with the rapidly changing narrative from the bank. Futures has a 35% chance of a hike priced in, however economists see a hike likely after the recent string of data and rhetoric.

The US will be quiet with the 4th of July public holiday, however we can look to non-farm payrolls and ISM data later in the week.

Thanks for listening, have a great week.

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