The Monday Report – 29 August 2022

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This story features BEGA CHEESE LIMITED, and other companies.
For more info SHARE ANALYSIS: BGA
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Well, I may have been wrong on that one. A complacent Wall Street was completely blindsided by Jerome Powell on Friday night when he said, in a nutshell, the Fed will continue to go hard on fighting inflation even if that does mean a recession, and anyone believing otherwise is misguided.

Suffice to say, we must take a wrap of Friday’s action on the ASX in the content of the futures closing down -104 points on Saturday morning.

Say Cheese

The theme of last week from Wednesday was of the local market pushing higher each day on earnings reports. Friday was no exception.

Not that results have been that fabulous, it's been more a case of could have been worse.

Take Bega Cheese ((BGA)) for example. The company saw its profit fall -69% year on year on covid/supply chain problems, and the stock rallied 11.8% to top the ASX200.

That said, with around two-thirds of companies due to report having now done so, FNArena’s gauge has beats only now starting to outstrip misses – 31% to 28% — when earlier the two had been neck and neck. Another hundred-plus companies will report this week.

Last week saw the macro taking a bit of a back seat, until it roared back on Friday night. So the market will first have to take a step down before the week’s round of reports make their mark.

Communication services was the only sector to close in the red on Friday (-0.3%), while energy, materials, healthcare and staples (Bega) all closed over 1% higher.

Technology posted the smallest gain (+0.2%), with Zip Co ((ZIP)) falling -5.3% another day after its result release. Leading US BNPL player Affirm posted an aftermarket result on Thursday night that had the stock down over -20%.

It was another day full of “kick-on” moves from reporting the day before, as the market absorbed broker assessments. Viva Energy ((VEA)) rose 6.9%, Qantas Airways ((QAN)) 6.6% and Insignia Financial ((IFL)) 4.0%, while on the other side of the ledger, City Chic Collective ((CCX)) fell another -10.6%.

Losers reporting on the day included Polynovo ((PNV)), which fell -18.8% but makes wild swings almost every day, and Smartgroup Corp ((SIQ)), which fell -11.4%.

Not much point in dwelling, as today will be a different story.

There’ll still be plenty of earnings reports nonetheless.

Oh the Pain

“Reducing inflation is likely to require a sustained period of below-trend growth. While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses.”

Powell’s “speech” lasted all of eight minutes. It was more akin to a headmaster ticking off students at assembly for their bad behaviour. He had clearly become frustrated the comments he made following the July FOMC meeting were misconstrued as being “dovish” — comments that helped add fuel to the 16% rally for the S&P500 off the June low.

Also adding fuel were the July CPI and PPI numbers, which came in at lower levels. Ahead of Powell’s speech on Friday night, data showed the July headline personal consumption and expenditure (PCE) measure of inflation fell by -0.1% in the month to take the annual rate down to 6.3% from 6.8%.

The PCE is considered a more evenly balanced measure of inflation components than the CPI, and the core PCE – the Fed’s go-to inflation gauge, fell to 4.6% from 4.8%. This, in theory, is the number the Fed wants to see back in the 2-3% range. However, the FOMC is fully aware that energy and food costs have been the primary driver of corporate/household pain to date, so they will not sit back and relax if the core PCE does fall back to 2-3% but the headline CPI is still running at 6-7%.

One month of lower inflation measures is welcome, said Powell, but by no means representative of the “sustained” period of lower inflation data the FOMC needs to see. To achieve that the Fed is still determined to keep pushing rates into “restrictive” territory and will keep them there until satisfied the inflation genie is back in the bottle.

Any assumption of a “pause” or a “pivot” in early 2023 has now gone out the window. A September rate hike of 75 points, irrespective of August inflation data in between, can likely be baked in.

Although not everyone believes so – last week one Fed president did point out that 50 points is still a big hike in historical terms, so September could still be 50 points, but perhaps so will November and December (no meeting in October given the six-weekly gaps).

Whatever the case, Wall Street was caught out on Friday night, and obviously it was the tech/growth sectors hardest hit.

US bond rates barely moved. The bond market, as has been pointed out, has been telling Wall Street not to be so complacent, yet the stock market ignored the signs. It has also been pointed out that more than anything else, the 16% rally for the S&P500 had been driven by massive hedge fund short-covering, along with momentum algos that don’t hold monetary policy opinions.

So it was always going to reach an exhaustion point.

Commodities

Despite an assumption the Fed has probably now diluted its “soft landing” aspirations, commodity prices do not reflect any great shock.

Oil prices retreated initially, but quickly came back.

Gold is the inflation hedge, so fighting it hard does not bode well for the gold price.

The greater pain was felt by the Aussie – down -1.2% to US$0.6892 with the US dollar index up only 0.4%.

The SPI Overnight closed down -104 points or -1.5% on Saturday morning.

The Week Ahead  

There are over a hundred local companies still to report this week, in a season that spills over into the first couple of days of September.

Metals and minerals are in the frame again today, with Fortescue Metals ((FMG)), Mineral Resources ((MIN)) and OZ Minerals ((OZL)) on today’s list.

The ex-dividend season is now seriously ramping up. Watch out today for Ansell ((ANN)) and Worley ((WOR)), among others.

Economically, locally today we’ll see July retail sales, followed by building approvals tomorrow, private sector credit on Wednesday and house prices on Thursday.

We’ll also see June quarter numbers for construction work done and private sector sector capex, ahead of next week’s GDP release.

The US will see monthly consumer confidence and factory orders, but most importantly private sector job numbers and non-farm payrolls for August.

On Thursday, manufacturing PMIs for August from around the world are due.

On Friday, S&P/ASX announces quarterly changes to index components, which become effective the week after.

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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