The Monday Report – 31 July 2023

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            [3] => ((LYC))
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            [3] => LYC
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This story features FORTESCUE LIMITED, and other companies.
For more info SHARE ANALYSIS: FMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Setting Sun

The yo-yoing of recent times continued for the ASX200 on Friday as all of Thursday’s gains, in the wake of last week’s CPI numbers, were wiped out. It could have been worse – the index was down -99 points at 2.30pm.

While the worst performing sector was materials (-1.2%), largely due to a sharp fall in the iron ore price, weakness across the board was largely due to a reverse spike-up in bond yields after falls in the sessions beforehand. The ten-year jumped 14 points to 4.07%.

The reason was, as had been flagged on Thursday night, the Bank of Japan lifted (within limits) the cap on its bond rate from 0.5% as yield curve controls were eased. This implies Japanese bond yields can now rise at least a little further, with inflation on the rise for the first time in decades, making Japanese investment in Japan more attractive to the Japanese.

For decades Japanese investors and pension funds have been investing in yields elsewhere – particularly in the US.

Real estate had jumped over 3% on Thursday and on Friday fell -1.9%. The banks lost a more modest -0.4%, but all of industrials, healthcare, staples and communication services fell.

More notable was discretionary, which copped a double-whammy. Australian retail sales fell -0.8% in June, when a flat result was forecast, having risen 0.8% in May.

Consumers are clearly tightening their belts, but inflation is also coming down, which muddies the picture in sales volumes terms. The result may be another reason for the RBA to consider a pause tomorrow.

Right now among economists, pause/hike is about a 50/50 bet.

Which may explain why, with Wall Street once again rebounding on Friday night and the S&P500 adding 1%, our futures were up only 0.3% on Saturday morning. Caution ahead of tomorrow’s meeting.

Among other sectors, energy, utilities and, surprisingly given the bond yield spike, technology sat it out on Friday.

The top five index losers on the day were all miners, spanning gold, graphite and iron ore. Fortescue Metals ((FMG)) fell -5.4%. Indeed, sixteen of the top twenty ASX300 stock falls were for miners.

Siteminder ((SDR)) was the standout winner among ASX300 stocks (+21.5%), after the booking and payment engine behind a number of hotels said revenue for FY23 was expected to grow 30.5% thanks mostly to 65.6% growth in transaction revenue. 

We could be shaping up for a quieter session today ahead of the RBA.

We’ll Take It

The US private consumption & expenditure measure rose 0.2% at the headline in June, as expected. The annual rate slowed to 3.0% from 3.8% (matching the CPI).

The one that matters is the Fed’s preferred core PCE, which fell to 4.1% from 4.6%. That’s still a ways from the Fed’s 2% target, and month-on-month disinflation is becoming more incremental.

One heartening factor was nonetheless an easing in the June quarter employment cost index to 1.0% from 1.2%.

Wall Street liked the numbers, as they provide more hope the Fed’s July hike will be its last. With no meeting until September (August brings Jackson Hole instead), there will be two more rounds of CPI/PPI data and two more jobs numbers in between (the first on Friday night).

US bond yields fell -4 points.

Yet Wall Street also liked the latest consumer sentiment numbers from Michigan Uni, released on Friday night. The final July reading came in at 71.6%, up 11.2% from the mid-July reading. A strong labour market and falling inflation were behind growing confidence.

Which is counter to the Fed’s goals.

It has been noted that while falling inflation is positive for retailer costs, it is negative for prices – they can’t just keep being increased – and that will weigh on margins going forward.

This point was noted by consumer products giant Proctor & Gamble on Friday night, as it released an earnings beat and jumped 2.8%.

Exxon on the other hand missed, and fell -1.2%.

Two stocks which reported in Thursday night’s aftermarket also went in opposite directions. Intel gained 6.6% and Ford lost -3.4%.

While sales of Ford’s traditional ICE offerings are healthy, the company’s announced increased investment in EVs, while at the same time reducing production, was not well received.

Sales of Ford’s EV version of its iconic F150 pick-up are not going that well.

Tesla rose 4.2%.

Apple and Amazon report this week.

Commodities

Iron ore is the standout.

Steel mills in China’s southwestern Yunnan province have been asked to prepare to cut back production to meet a government mandate on capping 2023 output at last year’s level. The orders follow similar instructions issued to mills elsewhere earlier this week, weighing on iron ore prices.

The Aussie is down -0.9% at US$0.6656.

The SPI Overnight closed up 19 points or 0.3% on Saturday morning.

The Week Ahead

The RBA meets tomorrow.

We’ll also see numbers for private sector credit, building approvals, house prices and trade over the week. On Friday, the RBA issues a Statement on Monetary Policy.

China reports its July PMIs today. Everyone else reports manufacturing PMIs tomorrow and services on Thursday.

The eurozone reports June quarter GDP tonight.

The Bank of England meets on Thursday night.

The US will see private sector jobs on Wednesday night and non-farm payrolls on Friday night.

The local reporting season quietly begins to ramp up from tomorrow.

Today we’ll see production reports from Origin Energy ((ORG)) and Lynas Rare Earths ((LYC)).

The Australian share market over the past thirty days…

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