The Monday Report – 29 May 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

Get Set

On Friday there remained no sign of a deal on the US debt ceiling but after the big sell-off on Thursday – largely technical as the ASX200 broke 7200 – Friday saw the index sluggishly claw back 16 points.

Later on Friday night both sides spoke of “optimism” a deal could be reached over the weekend, sending Wall Street surging and our futures up 70 points on Saturday morning.

In the interim, a deal has been reached and legislation will go to the House on Wednesday night. As there will likely be objections from both the far left Democrats on the one hand and and far right Republicans on the other, given concessions made on both sides, passage of the deal is not guaranteed. It then has to get through the Senate.

The news should nevertheless cement Wall Street’s optimism on Friday, although we’ll have to wait till Tuesday night to see further response, as Wall Street is closed tonight.

Friday’s local trade saw comebacks (bargain hunting?) for the banks (+0.5%) and materials (+0.9%). In the former case, Westpac ((WBC)) joining the ranks of banks no longer offering cash-backs on new mortgages would have helped, implying the loan war is cooling off, and in the latter case, some stabilisation in iron ore prices provided comfort.

Consumer discretionary also made a comeback (+0.5%) with likely short-covering in play, despite weak April retail sales data.

Sales were flat in April, having risen 0.4% in March, and missing 0.3% growth expectations. Growth over the past few months has been led by dining/takeaway, as sales of goods fall, but it seems the post-covid spree is now over. Sales in that category fell -0.2%, while food sales fell -0.1% to confirm belt-tightening.

Household goods spending continued its trend (-1.0%).

The good news is this plays into an RBA pause next month.

Worst performer on Friday was healthcare (-0.8%), as the biggies drifted lower and Fisher & Paykel Healthcare ((FPH)) fell -6.3% on its earnings result to be the worst index performer.

Real estate was also weak on higher bond yields (-0.7%), while winner on the day was technology (+1.6%) as the Nvidia excitement kicked on. Networker Megaport ((MP1)) topped the index with 6.2% and AI-aspirant BrainChip Holdings ((BRN)) matched the move.

It will no doubt be another good day for tech today with the Nasdaq up 2.2% on Friday night.

And a good day all round, with our futures suggesting a near 1.0% rebound that would take the index back above 7200.

The Other Problem

As noted, Wall Street was merely optimistic on Friday night a deal could be reached over the weekend ahead of a deal actually being reached, for what it's worth at this stage. There was also relief when Janet Yellen announced she’d found some loose change down the back of the couch, and pushed D-Day out to June 5 from June 1 prior.

The excitement was enough to overcome what was otherwise a set of “hot” PCE data.

The headline personal consumption & expenditure index rose 0.4% in April against 0.3% expectation, taking the annual rate up to 4.4% from 4.2% in March. The core rate also rose 0.4%, taking it up to 4.7% from 4.6%.

The glass half full brigade shrugged off the results as a case of there were always going to be bumps, and April was a long time ago in the scheme of things, while the glass half empty brigade points to stubborn, sticky inflation, particularly in housing (rent), underscoring the need for further rate hikes.

Fed speakers played the half empty card on Friday night, and Wall Street has now shifted the chance of a June hike from roughly 50/50 to above 60%.

The bond market is also playing it cautiously, as the ten-year was little changed and the two-year actually rose a few points. We might have expected some solid falls on the debt ceiling news given yields have been ticking up day by day recently on that risk.

Adding to the potential for more hikes was April personal consumption, which rose a full 0.8% when 0.4% was forecast, on an increase in incomes of 0.4%. Consumers spent up on new cars and services.

Data on durable goods orders in April were mixed, with orders rising 1.1% when 0.8% was forecast, but falling -0.2% if military orders are excluded. Yet, business investment rose a solid 1.4% following months of weak readings.

The US March quarter GDP estimate of 1.1% growth was revised up to 1.3%.

There is nothing here to suggest the Fed simply must pause, particularly given the regional bank crisis appears to have settled, for now.

Meanwhile, the AI band marches on. Another chip-maker, Marvell Technologies, reported earnings on Friday night and jumped 32%, mostly on revenue guidance. And another, Broadcom, jumped 11% ahead of its result this week.

1999 all over again? No, say some, it’s only 1995.

Commodities

Debt ceiling relief flowed into commodities.

Note that both the US and UK are closed tonight, so no LME trading either.

The Aussie is up 0.3% at US$0.6527.

The SPI Overnight closed up 70 points or 1.0% on Saturday morning.

The Week Ahead

Wall Street will reopen on Tuesday night with monthly consumer confidence data, followed by private sector jobs on Wednesday and non-farm payrolls on Friday.

China will report May PMIs on Wednesday and everyone else on Thursday, June 1.

In Australia we’ll see April data for building approvals private sector credit and housing this week, along with March quarter data for construction work done and private sector capex ahead of next week’s GDP result. On Wednesday we'll also see a reading for April CPI.

ALS Ltd ((ALQ)) reports earnings today and Champion Iron ((CIA)) on Wednesday.

Alumina Ltd ((AWC)) holds its AGM today, followed by Atlas Arteria ((ALX)), Life360 ((360)) and Nickel Industries ((NIC)) over the week.

The Australian share market over the past thirty days…

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