The Monday Report – 15 August 2022

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This story features WOODSIDE ENERGY GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: WDS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Just a Scare

Wall Street had shot up initially on a lower PPI print on Thursday night before rolling over to close flat, suggesting maybe the comeback rally had run its course. The local market thus ran scared from the open, dropping -56 points in the first hour when the futures had suggested -20.

It didn’t help that the US ten-year yield had risen 10 points overnight on some easing of Fed aggression fears, sending our ten-year up 12 points to 3.40%. And the Aussie to over US71c.

The index ultimately closed down -38 points but rollover fears were extinguished on Wall Street on Friday night. Our futures closed up 39 points on Saturday morning so, as you were.

The best sector performance was a standout 2.3% gain for energy on higher oil prices, with sector leader Woodside Energy ((WDS)) topping the charts with a 3.7% gain. Only two other sectors – staples and communication services – managed to close in the green, just.

The banks got away with a -0.2% fall, including Suncorp Group ((SUN)) going ex-div, but elsewhere interest rate and currency impacts were evident, with real estate the worst performer (-2.0%). Technology fell -1.8%.

The stronger currency weighed on healthcare. ResMed ((RMD)) fell -3.1% post result.

Industrials, materials and utilities all fell around -0.7%.

Higher interest rates are not good for consumers. Discretionary fell -1.2%.

Reporting earnings on the day, Insurance Australia Group ((IAG)) rose 1.1%.

Retail darling Baby Bunting ((BBN)) fell -4.9% and may need changing.

Avita Medical ((AVH)) fell -15.6%.

The index held above 7000 on Friday and should do so further today. But Wall Street notwithstanding today marks the real beginning of the local earnings season, as reports begin to flood in following the trickle of the last two weeks.

Depending on what macro backdrop we’re handed, the micro now comes to the fore.

Don’t Look Back

Wall Street’s rally from the June low began with perceptions of “oversold” conditions and falling bond rates, was boosted in July by, on average, not-as-bad-as-feared earnings results, and accelerated on last week’s reported dip in annual CPI. The S&P500 has now bounced back 15% and the Nasdaq 23%.

The CPI result on Wednesday was followed by the PPI on Thursday and it, too, showed signs of inflation easing. But after an initial surge, Wall Street rolled over and closed flat on the day. Many a commentator has suggested this rally can only go so far, and Thursday was a sign perhaps it had now gone as far as it was going to.

But no. On Friday the indices took off again from the open, and continued to track higher still all session in a rather FOMO manner.

If there was any trigger to counter the sentiment seen on Thursday night, it was the release of the initial Michigan Uni consumer sentiment index for August. It rose to 55.1 to 51.5 at end-July, and the inflation expectations component within the index dropped to 5.0% from 5.2%.

The numbers further fuelled the belief the Fed will now need to start easing the pace of rate hikes from here – further cementing an assumption the September hike will only be 50 points, not 75.

It matters not that Fed rhetoric ever since the July CPI release has been far more contrary to the market’s view than supportive. One swallow does not a summer make, and the FOMC is determined to continue its hikes until there is evidence of a “sustained” period of inflation under control.

As for how long “sustained” is, well we’re reminded there was never a definition provided of “transitory” either.

The US stock market, and the US bond market, are fighting the Fed. An inverted yield curve suggests a recession ahead, and therefore not just an easing in the pace of Fed rate hikes but actual rate cuts by next year.

The problem is there is not another Fed meeting until September, by which time August inflation data will have been released. If we can identify anything that might roll Wall Street over once more in earnest, it would be (1) an August annual inflation number higher than July’s, or (2) a lower inflation number but the Fed hikes by 75 points in September anyway, given two months of decelerating inflation do not a summer make.

One also has to ask, even if 8.5% inflation is better than 9.1% inflation, what exactly is good about 8.5% inflation?

The other issue is the 15% bounce for the S&P500 has it almost back to the 200-day moving average which, incidentally, is still in a down-slope despite the rally. The S&P is still down just over -10% from its high.

200-day moving averages are often levels of either support or resistance, depending which way the market is trending.

Wall Street moves into this week on a high note, but the next catalyst will be this week’s swag of earnings reports from US retailers, including big names such as Walmart (Dow), Target and Home Depot (Dow), along with July retail sales data.

Commodities

Investors counting on a softer global economy to pull commodity prices lower may instead be faced with scare-supplies and inflation, as the market is awash in contradictions, Goldman Sachs warned clients on Friday night.

“Today, commodity markets appear to hold irrational expectations, as prices and inventories fall together, demand beats expectations and supply disappoints,” wrote Goldman’s commodities team.

They note the commodity space has moved from hoarding to destocking, with consumers using up inventory at higher prices on the hopes that a broad softening of the economy will create extra supply, Dow Jones reported.

“Yet should this prove incorrect and excess supply does not materialize as we expect, the restocking scramble would exacerbate scarcity, pushing prices substantially higher this autumn, potentially forcing central banks to generate a more protracted contraction to balance commodity markets.”

The Aussie is up 0.2% at US$0.7123 despite the US dollar jumping back 0.5%, which did not help commodity prices on Friday night.

The SPI Overnight closed up 39 points or 0.6% on Saturday morning.

The Week Ahead

Japan will report June quarter GDP numbers today, while China releases July retail sales, industrial production and fixed asset investment data.

The US will also see retail sales and industrial production numbers this week along with housing sentiment and starts.

The minutes of the July Fed meeting are out on Wednesday night.

The RBNZ meets on Wednesday.

The minutes of the July RBA meeting are out tomorrow. Wednesday brings the critical June quarter wage price index and on Thursday, July jobs numbers.

Earnings results today include those of Bendigo & Adelaide bank ((BEN)), Beach Energy ((BPT)), BlueScope Steel ((BSL)), Carsales ((AR)) and JB Hi-Fi ((JBH)).

Westpac ((WBC)) releases a quarterly update.

FNArena’s Corporate Results Monitor provides both a calendar of upcoming result releases and a summary of all reports to date.

Also: https://www.fnarena.com/index.php/reporting_season/

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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