The Overnight Report: Retail Sales, Bonds & Ai

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This story features AFT PHARMACEUTICALS LIMITED, and other companies.
For more info SHARE ANALYSIS: AFP

No Comments from Chris Weston today.

Good morning,

The ‘secret’ so to speak underneath the 31st all-time record high for American equities lays in yet another signal the US economy is decelerating. Slowing economic momentum means inflation should trend lower, all else remaining equal, and this means those Fed rate cuts are becoming more realistic.

In practical terms all this means lower bond yields, which weighs on the US dollar, and provides yet another reason to pile into Big Tech and other US equities, Ai-related or otherwise, with exception of the consumer discretionary sector as yesterday’s signal for economic slowing was provided by a disappointing read on retail sales (May, with downward revisions for the preceding readings).

In individual stock news, and surely a sign o’ the times, shares in Nvidia added another 3.5% and have overtaken Microsoft to become the world’s most valuable company. On the other side of the market moving, homebuilder Lennar stock fell -5% after forecasting lower than expected third quarter home deliveries.

US markets will remain closed today. The local market had an absolute blinder yesterday (mostly) with SPI futures suggesting traders locally have little appetite to push momentum even further.

As we are approaching the mid-year point, here’s a quick overview:

-Nasdaq Composite: +19.0% YTD
-S&P 500: +15.0% YTD
-S&P Midcap 400: +5.3% YTD
-Dow Jones Industrial Average: +3.0% YTD
-Russell 2000: -0.1% YTD

In Australia, the ASX200 year-to-date is up 2.47% ex-dividends.

Here’s how CIBC viewed the retail sales data for May:

Total retail sales disappointed in May, rising by 0.1% compared to expectations of a 0.3% gain. The prior month was also revised down two ticks to -0.2% decline. The control group of retail sales which feeds into non-auto core goods consumption in GDP increased by a healthy 0.4% in May, a shade below expectations of a 0.5% gain.

However, the prior month reading on the control group was revised down by two notches to a 0.5% contraction. Today’s data suggests the US consumer’s voracious appetite could be normalising. The pace of consumer spending has slowed this year after a very strong second half of 2023, a sign that the trend is bending. That is good news for the Fed and some more evidence that demand in the economy is cooling, consistent with the broad rebalancing of the labour market. We expect the Fed to cut twice this year, in September and December. 

Eight of the thirteen retail sales categories posted gains in the month, with the largest increases coming from sporting goods, clothing and non-store retailers. Interest-sensitive categories (cars, furniture, electronics and building materials) were mixed in month. So overall, some solid breath to May increase.

The big story in retail sales is that, as the dust is settling with data revisions, the pace of consumer spending on goods has clearly shifted down a gear or two in the first half of this year. Core retail sales on a six-month annualised basis is sitting at 1.8% in May, compared to the 5-6% range it was during most of the second half of the year. The vast majority of that slower pace is due to softer gains in non-store or online retailing. American homes are full to the brim of stuff and the pace of spending on goods is slowing as a result. In pre-pandemic times, one would expect a larger pullback, but with wealthy retirees and increased work-from-home, the level of goods spending is unlikely to adjust back to where the pre-pandemic trend would suggest it should be.

With the labour market cooling very gradually, and wages-adjusted for productivity very close to a pace consistent to 2%, nominal consumer spending in the 5-6% certainly seems out of a reach now and a further deceleration in consumer spending is equally possible. A saving rate in the mid 3% range also seems unsustainable, and households will want to increase their rainy day funds as they see their employers being more cautious.

While the consumer is partly insulated from higher rates through long-dated mortgages, tighter monetary policy is bearing down on their employers. Businesses are facing higher financing costs for a prolonged period of time, and as a result, they are passing on fewer wage gains and have slowed the pace of hiring. An increase in the supply of labor is no doubt is helping this transition as well.

The Fed has not said too much about the consumer, including during the incredible run in second half of 2023, and we expect spending data sits firmly third in the pecking order behind inflation and labor, but they should not doubt look at this data as favourable and more confident that the economy is indeed gradually slowing.

The consumer has been the main engine of growth over the past three quarters and while spending on services remains solid, the rebound in goods consumption after last quarter’s contraction is looking fairly modest.

Most currencies and commodities took advantage of the weakening US dollar, though aluminium failed to join in.

On the calendar today:

-Block (of former Afterpay fame) AGM
-AFT Pharmaceuticals ((AFP)) ex-div 0.98c
-UK consumer prices are released
-US financial markets are closed in observance of Juneteenth National Independence Day
-The NAHB housing market index

Corporate news in Australia:

-Fletcher Building ((FBU)) is selling half of its operation in Fiji
-Brambles ((BXB)) to acquire Loscam’s South East Asia business
-Shares in MMA Offshore ((MRM)) are signalling a higher bid might be forthcoming
-Schrole Group ((SCL)) agrees to take-over
-City Chic ((CCX)) aims to raise $25m and has sold its American brand, Avenue, to a New York buyer
-CleanTech Lithium is on a roadshow to raise $100m for an Australian dual listing. The stock is currently listed on the London Stock Exchange’s AIM
-An embedded culture of inappropriate behaviour at Nine Entertainment ((NEC)) continues to plague the media conglomerate with SafeWork NSW now reportedly in on the act
-Market shatter about who has been selling $1.1bn in shares in Fortescue ((FMG)) this week?
-Apparently, Alan Joyce’s $16m Qantas Airways ((QAN)) payout is still up in the air

From Michael Brown Senior Research Strategist at Pepperstone, written before this morning’s market close:

The S&P 500 has, at the time of writing, notched 30 record closes this year, the most since the 70 ATHs notched back in 2021.

On a proportional basis, the benchmark index has closed at a record on 26% of all trading days in 2024. If the market were to keep up this pace for the entire year which, of course, is by no means guaranteed it would represent the third best year on record, after 1995 and 2021, in terms of the percentage of trading days on which the market scored a new record close.

Seasonal trends support the idea of a steady grind higher, though of course such trends should never be solely relied upon as the backing for a trade.

Over the last five years, July has on average proved to be the 2nd best month of the year for the S&P 500, with the index having ended the month in the green for 9 years in a row.

Pedigree for the Nasdaq100 is even stronger, with the index having rallied in July for 16 years on the spin. Couple this with the Fed put’ remaining as flexible, and forceful, as it has done all year, and the path of least resistance’ should continue to lead to the upside for equities, with dips likely remaining shallow in nature, and being bought into rapidly.

Some, at this stage, may cry the market is overbought!’. And, they’d be right the Nasdaq100’s 14-day RSI currently resides just north of 80, well above the 70 handle which typically sparks such cries, and its highest level since 2018.

Those seeing this as an automatic reason for the market to pullback, however, may well be disappointed since that year, on a sample of 42 times that the RSI has crossed above 70, the index has delivered a positive one-month return 7 out of 10 times.

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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