The Monday Report – 20 February 2023

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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Borrowers in Focus

Alongside its quarterly report, Westpac ((WBC)) warned on Friday almost half of its $471bn in home loans were written using interest rate buffers that are set to be exceeded.

The good news is bad debts remain low. Westpac said it had experienced only a small increase in the number of mortgage borrowers who were more than 30 days late on repayment. Westpac also pointed to the fixed rate refinancing “cliff” as being prolonged, noting $56bn of fixed-rate loans will expire in the second half of 2023, and a further $57bn in 2024, then $30bn in 2025.

That’s just Westpac.

Meanwhile, Philip Lowe was back on the rack in Canberra. About $350bn in low-interest fixed rate loans will switch to higher variable rates this year, the RBA governor told a parliamentary panel. Borrowers servicing 880,000 fixed rate loans “face very significant increases” in repayments this year when they switch to much higher variable rates.

The financials sector fell -0.8% on Friday, even as bond yields rose again (ten-year up 6 points to 3.81%). The focus for bank investors is now squarely on loan risk, and not net interest margins. The fall in financials would have been worse if not for a 7.4% pop for QBE Insurance ((QBE)) on result. Insurers do like rate rises.

The ASX200 was always going to be in for a tough day after Wall Street bottled on inflation numbers on Thursday night. The index opened down and spent the rest of the session moving gradually lower.

Outside of inflation and mortgage stress issues was another round of earnings results. While QBE topped the ASX200 winners, there were some big moves within the ASX300.

Integral Diagnostics ((IDX)) fell -15.0% and PWR Holdings ((PWH)) -13.8%. Baby Bunting ((BBN)) lost -6.1% and GQG Partners ((GQG)) -4.5%.

Not many on the plus-side – that nevertheless featured decent moves for companies that had reported earlier in the week and either rose or fell on result. Corporate Travel Management ((CTD)), GUD Holdings ((GUD)), Super Retail ((SUL)), Orora ((ORA)) and Pact Holdings ((PGH)) all had good sessions.

Otherwise, the only sectors to close in the green were utilities (+1.0%) which is clouded by takeover potential, and staples (0.3%) on a 6.3% jump for a2 Milk ((A2M)) following positive news on the China’s State Administration for Market Regulation audit process.

Interest rate-sensitive sectors were the worst performers, and a -2.3% fall for technology was exacerbated by a -7.8% tumble for Block ((SQ2)), and -3.6% for WiseTech Global ((WTC)) after it acquired Blume Global, a provider of intermodal rail solutions in North America.

Energy was another big loser (-1.8%) on falls in oil and coal prices, and materials (-0.7%) responded to a mixed bag of price moves.

Wall Street did little to move the dial on Friday night, and will be closed tonight for Washington’s birthday. Our futures closed down one point on Saturday.

Pause to Reflect

Last week saw a run of “hot” US January data – CPI inflation, retail sales and PPI inflation – which had followed a “hot” jobs number the week before. The Dow closed down -0.1% for the week, the S&P500 -0.3% and the Nasdaq -0.6%.

Wall Street rode through the data with gritted teeth earlier in the week, before finally bottling on Thursday night. Yet the weekly moves are hardly representative of a stock market in grave fear.

With no major data releases on Friday night, ahead of a long weekend, Wall Street went quiet, contemplating just how many more rate hikes can be expected from the Fed. The market had been hoping for just the one before the jobs number, and then maybe only two before the inflation/sales data. Now consensus is looking at three.

Hikes in March, May and June (no April meeting) would take the funds rate to 5.25-5.50%, which is where the last dot plots showed convergence among FOMC forecasts. Helping to rattle the nerves last week were consistently hawkish comments from various Fed speakers.

“I don’t think we’re seeing what we need to be seeing, especially with inflation,” said Fed Governor Michelle Bowman on Friday night. The inflation data in January “is not tracking with consistently lower inflation”.

Last week two Fed speakers suggested the hike in March should be 50 points.

Yet following the swift, sharp run of rate hikes through 2022, Wall Street is looking through to the other side. Futures markets are still pricing in a Fed rate cut later this year, even as economists forecast the 5.25-5.50% band to be held to the end of 2023.

The two sayings on Wall Street are “Don’t fight the Fed” and “Don’t fight the tape”. Right now the Fed and the tape (market) are at odds.

Commodities

Russian oil producers expect to maintain current volumes of crude oil exports, despite the government’s plan to cut oil output in March, a Russian newspaper reported on Friday. They best be careful they don’t find themselves committing suicide out a hotel window.

Last week’s US crude inventory data showed ample supply, and the US rig count has increased by 18% year on year. Put it together and there’s pressure on oil prices.

The Aussie is down a bit at US$0.6870.

The SPI Overnight closed down -1 point on Saturday morning.

The Week Ahead

We now head into the busiest week of local earnings reports, by a margin. The US season is tailing off, but there are still a couple of biggies to come this week in the form of Dow stocks Home Depot and Walmart.

The minutes of the February RBA meeting are out tomorrow, but I doubt there’s much more the board can add.

This week brings lead-up numbers to next week’s December GDP result, in the form of the wage price index, construction work done and private sector capex.

The RBNZ and ECB hold policy meetings this week.

The minutes of the February Fed meeting are also out this week. Any further clues? The US will also see new and existing home sales, consumer sentiment and PCE inflation.

Global flash estimates of February PMIs are out tomorrow.

Today’s earnings reporters include a2 Milk, Bendigo & Adelaide Bank ((BEN)), BlueScope Steel ((BSL)), Charter Hall ((CHC)), nib Holdings ((NHF)), Ampol ((ALD)) and Viva Energy ((VEA)), among plenty more.

Ansell ((ANN)), Vicinity Centres ((VCX)) and Wesfarmers ((WES)) go ex.

For a calendar of earnings result releases and a summary of earnings results to date, refer to FNArena's Corporate Results Monitor (https://www.fnarena.com/index.php/reporting_season/)

The Australian share market over the past thirty days…

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