The Monday Report

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

By Greg Peel

The Wow Factor

It was another choppy session on Friday to wrap what was the last big day of the local result season, notwithstanding a handful of latecomers reports due today. When the dust settled it was another flat close featuring a mix of red and green among sectors.

The resource sectors were always in for a bad day given overnight falls in the oil and iron ore prices, and the fact the big names have now all published their disastrous results and ended speculation over dividend policies. But there was one big name to report on Friday, and its influence was clear.

It was the first loss in decades for Woolworths ((WOW)), thanks to the Masters write-off, although the underlying result was nothing to smile about either. The size of the loss sent Woolies shares crashing a further 6% on release, but the key here is the word “further”.

Woolies’ share price has been falling through 2016 on a combination of food price deflation, a failure to make a dent in rival Coles, and ultimately the decision to bail out of the train crash that was the Masters foray. Woolies shares were even dragged down further still last week when Wesfarmers ((WES)) posted a disappointing result, even though that was all about coal and not about Coles. So in a classic case of “sell the rumour, buy the fact”, Woolies shares bounced immediately and powered back through the day to a 2% gain.

The ASX200 chart shows a pretty well correlated picture.

Consumer staples finished up on the day but not so consumer discretionary, which suffered due to a poorly received result from Harvey Norman ((HVN)). The banks were off a little but falls in the resource sectors were balanced out by a rare strong day for Telstra ((TLS)), a mega-cap that has been much maligned of late.

Aside from the aforementioned handful of companies to report today, attention in the local market now turns to the economy. Before a backdrop of what has been a disappointingly directionless debate over tax reform, this week will see an RBA policy meeting ahead of Wednesday’s December quarter GDP result. Economists are predicting annualised 2.6% growth, up from the September quarter’s 2.5%.

Fed Follies

Meanwhile, the equivalent US GDP result was revised for the second time on Friday night. Economists had expected a downgrade to a mere 0.5% growth from the previous 0.7% revision, so there was some shock when the number came in at 1.0%.

Suddenly fears were rekindled of a Fed rate hike. However the disparity between the result and forecasts came down to an inventory build. Inventory builds are two-edged swords – in a strong economy they can reflect a deliberate attempt to get on top of growing demand, but in a weak economy they can reflect a misreading of weak demand, and herald possible discounting ahead.

Economists have suggested the latter in this case. The US economy grew 2.4% in 2015, as it did in 2014, again failing to reach the 3% average rate. There is nothing here to suddenly spark the Fed into action.

Inflation might be a different matter. I noted last week that while a rise in the US CPI was another reason Fed fears had again become rekindled, it is well known the FOMC prefers to ignore price inflation and use the personal consumption & expenditure measure as a more realistic gauge of overall inflation. Well, January’s PCE reading of 1.3% was a big jump on December’s 0.7%.

It’s still a long way from the Fed’s 2% target, but the FOMC itself has suggested that while it may yet take a while to get to 2%, if the trend is rising then inflation becomes a risk if monetary policy does not respond in anticipation. Is this enough to secure a March Fed rate hike? Probably not in isolation. The Fed remains “data dependent”, which is code for “no idea at this stage”, and most data readings have been on the weak side of late, particularly the PMIs.

This week sees a raft of US data releases, including the PMIs, and culminating with the February jobs report on Friday night.

Whether or not the PCE reading had much of an impact on Wall Street on Friday is unclear, as at the end of the day the Dow basically tracked the oil price yet again. Oil popped early on another weekly reduction in the rig count, but fell away as the session progressed. Ditto the Dow, which closed down 57 points or 0.3%. The S&P500 fell 0.2% to 1948, splitting the difference on a 0.2% gain for the Nasdaq.

Commodities

West Texas crude was down US10c at US$32.96/bbl on Saturday morning and Brent was up US15c at US$35.35.

Iron ore fell US20c to US$49.00/t.

The flip-flopping base metal market decided on a flip on Friday night, largely due to the better than expected US GDP result and the fact oil was up during the LME session and fell back after the exchange had closed. Copper jumped 2%, lead 3%, zinc 1.5% and nickel 0.5%.

Prices rose despite the offset of the implications of a stronger US GDP result being the US dollar, which rose 0.8% on its index to 98.08. The PCE number would also have been an influence.

Greenback strength meant gold fell US$12.50 to US$1223.50/oz.

And there was some relief for the Aussie on US dollar strength. It suddenly dropped 1.5% to US$0.7131, suggesting there might have been a build-up of long positions heading into this week’s RBA meeting and local GDP release.

The SPI Overnight closed up 7 points on Saturday morning.

The Week Ahead

It is the last day of the month today – Happy Birthday to all those who look 60 but are really only 15 – which can always bring some book squaring argy-bargy. The last few straggler earnings reports will include Slater & Gordon ((SGH)), which is not set to be pretty.

Today’s local economic releases include December quarter company profits and inventories and monthly private sector credit. Tomorrow is manufacturing PMI day across the globe and Beijing will additionally release the official Chinese service sector PMI. Australia will see the December quarter current account, including the all-important terms of trade.

Wednesday it’s the GDP result, and it’s service sector day across the globe, other than the official Chinese result. Australia’s January trade balance is due, followed by retail sales on Friday.

The RBA will meet tomorrow but no change is expected. It will all come down to the language of the statement.

The US will see the Chicago PMI and pending home sales tonight, the manufacturing PMI, construction spending and vehicle sales on Tuesday, and private sector jobs along with the Fed Beige Book on Wednesday.

Thursday it’s the services PMI, chain store sales and factory orders, and Friday it’s non-farm payrolls.

It will be the last US jobs report the Fed will see before its March 16 meeting.

Note that the local market is entering a period in which a number of companies go ex-dividend, dragging on the index. There are quite a few today.

Rudi will appear on Sky Business on Thursday afternoon under the revised program formula & scheduling.

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms