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Good morning, its Monday 24th July and I’m Brendan from Milford Asset Management.

Last week was the first week of US earnings, which on average came in above low expectations. The S&P 500 finished the week up 90bps while the Nasdaq finished down 65bps, highlighting the burden of higher expectations and more full valuations in tech stocks.

Categorizing this burden well was the Netflix result early in the week. The company delivered better than expected second quarter adds, however the stock traded down 8% on the day given the market implied expectation was much larger after the 50% increase year-to-date. Interestingly, their password crackdown seems to have been a success, with Netflix adding 5.9m adds in the second quarter versus consensus around 2.5m.
In a similar fashion, the Tesla result was softer than the market had hoped for. Revenue and gross profit was a touch ahead of consensus, but EBIT was 6% below consensus and free cash flow was 56% below consensus. On the call, company executives also outlined that vehicle production would slow in the third quarter due to shutdowns for factory improvements.
For a read on the US consumer, many were watching the United Airlines and American Airlines results last week, both of which outlined strong second quarter earnings and surging demand. The United result in particular was very strong, with earnings coming in 25% ahead of consensus and management increasing their full year EPS guidance by 5%. The results reaffirmed the read we have been getting from retail sales reports, with the latest report showing continued strength despite missing the consensus number.
In economic news, the key event last week was UK CPI, which for once was good news.

The report outlined a move lower in both headline and core inflation, with the latter printing at 6.9% yoy vs consensus at 7.1%. At the headline level, the key downward drivers were transport and food, with smaller downward contributions from a range of categories. On the core side, the decline was attributed to both core goods and services. The negative in the print was the services inflation number that printed at 7.2% yoy from 7.4%, some 50 basis points above the bank of England forecast. This number has been a major focus for them given the correlation with wages growth that is running very hot, so this may prove to be the swing factor on whether the bank hike by 25 or 50 basis points at their next meeting.
We also got a read on the Australian labour market, which outlined further strength. 33K jobs were added in June vs consensus expectations of 15k, while the unemployment rate fell to 3.5% from 3.6%. Hours worked bounced 0.3% mom, indicating strong household income and a positive read through for second quarter GDP.
New Zealand CPI came in at 6% for the second quarter, a touch above consensus but 10bps below the RBNZ forecast. Non-tradeables inflation, which is the best measure of domestic inflation, printed at 6.6% yoy vs RBNZ expectations of 6.3%, outlining the stagflationary issue the RBNZ is contending with.
In trans-tasman equity news:

Flight centre lifted its EBITDA forecast by 7%, with Leisure and Corporate both contributing equally to the upgrade, with no signs of demand weakening in either channel. The result is inline with global peers, outlining the resilience in services spending in key geographies.
Ampol reported their first half results, which outlined a weaker refining performance but strength in non-refining. The weakness in refining wasn’t a surprise given an outage at the plant, and the strength in non-refining was very encouraging so the net outcome is favourable despite the EBIT miss.
Northern Star reported a full year result that just met guidance, but FY24 guidance for production of 1.6-1.75m ounces was disappointing. They also outlined growth capex that was above consensus, which is likely to pressure free cash flow and margins. The stock finished the week down 12%.
Dual listed steel company, Vulcan steel, downgraded FY23 EBITDA by 8%, outlining higher acquisition integration costs. They noted that margins are still tracking to expectations, but steel volumes are down 13%. Given the economic sensitivity of the stock, the downgrade wasn’t taken well despite it being largely attributed to acquisition costs and not underlying performance, with the stock finishing the week down 15%.
The week ahead is a very busy one, with 40% of the S&P 500s market cap scheduled to report.

We also get a flurry of key economic data, including the Fed’s preferred inflation measure, the PCE, as well as Q2 US GDP and global flash PMIs which will help to understand the growth outlook.
The other key events are the FOMC and ECB meetings, where a 25bp hike is expected at both meetings.
One final piece of data we will be watching closely is the Australian second quarter CPI reading, for a guide on the likely policy reaction at the August RBA meeting.

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

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