Weekly financial market update - 20th of February 2023

Markets again drifted lower. In the US, whilst macro data continues to reinforce a potential soft landing thesis, core CPI and PPI readings still suggest some stickiness in inflation, with a further reset in peak rate expectations working against a resilient equity market. Closer to home, comments from Governor Lowe suggest an RBA is more worried about inflation risks than activity risks. Fixed interest markets are now pricing in a further three hikes, which appears more justified based on these comments.

CBA suggests that month-to-month net interest margins peaked in October, denting the thesis of several bank bulls and sending the sector down -6% for the week.

The S&P 500 was -0.2% for the week (+6.5% YTD), including a -0.3% move on Friday night our time. The NASDAQ was +0.6% (+12.8% YTD). The S&P/ASX 200 was -1.1% (YTD +4.4%), with Resources (-1.2%) modestly underperforming Industrials (-1.1%). S&P/ASX 200 futures suggest a flat open to the week.

KEY MARKET DRIVERS

• US (and broader) market narrative continues to revolve around equity market resilience in the face of another reset in peak rates and H.2 US rate cut expectations. US macro data continued to be supportive, reinforcing a soft landing thesis. However, concerns around labour market strength and sticky inflation continue to feed concerns that overly aggressive tightening will result in a ‘policy mistake’.
• Governor Lowe’s comments and tone during the week suggest that he is more worried about inflation risks than activity risks. Market pricing of three more hikes in a quick flurry looks justified in these remarks.
• A comment by CBA in its results presentation that they saw net interest margins peak (on a month-to-month basis) in October sent Bank stocks down -6.1%. With bad debts well below normalised levels, credit growth moderating, and costs stubborn, higher net interest margins were to be the path to stronger bank earnings.
• Domestic interim reporting season continues at pace. A few themes to date: Revenue beating expectations (more around price rises than volume growth) but missing on margins; Supply chains normalising; The consumer is slowing but not collapsing; Housing correction underway but orderly; Cost inflation persists but abating; Inventory still ahead of expectations remains a risk and signals a slowing environment; Labour tightness still an issue in some sectors; Continued return to post-Covid normal in industries most affected.
• A couple of other interesting comments from CBA MD & CEO Matthew Comyn in the H.1 result presentation: ‘If we assume that there are two further cash rate increases, Australian homeowners have to-date only experienced about half of the likely impact on monthly cashflows’.
  ‘We can see some customers drawing on savings and reducing spending to compensate. And yet, we have not seen this translate into customers falling behind on repayments.
• The ACCC will investigate how banks set deposit rates. In most cases banks have fully passed through the cash rate target increases to their home loan interest rates, however, increases in interest rate attaching to deposit products appear to have typically been smaller and less consistent.

MACRO / ECONOMIC NEWSFLOW

• In prepared remarks before a House committee, RBA Governor Lowe reiterated more rate hikes are expected over the months ahead. The extent of additional tightening depends on global economic developments, the evolution of household spending and the outlook for the labour market and inflation. While inflation likely peaked around end-2022, Lowe said a moderation in demand is needed to return it to target.
• The Westpac consumer confidence index fell 6.9% in February to a recessionary level of 78.5, retracing the modest improvement of the recent months. The survey captured the RBA's February Board meeting and the release of the 3Q2022 CPI data. There were substantial falls in subcategories around perceptions of finances, economic conditions, and whether or not it was a good time to purchase a major household item.
• NAB Surveyed business conditions rose +5pts to +18 in January, well-above-average levels, after several months of easing in late 2022. Business confidence also rose in the month (+6pts to +6). Capacity utilisation rebounded 1.9pp to 85.7%, near the record high seen in mid-2022.
• Headline and core January US CPI came in largely in line with consensus, though services inflation remained stubbornly high. Annualised CPI was down 0.1% to 6.4% (consensus 6.2%).
• January US PPI at +0.7% m-o-m came in hotter than consensus of +0.4% (December -0.2%), Core PPI +0.5% m-o-m (consensus +0.3%, Dec-22 +0.3%)), with goods prices rising their fastest since last June.

EARNINGS SNIPPETS - RESULTS TO DATE 

• Amcor In line result with constant currency sales up 2% on 1% lower volumes. Operationally sound but highlighted softening demand in 2Q and now expect FY at lower end of guidance.
• Bapcor Result in line, revenue +11% on p.c.p., EBITDA +7%. Trade, Specialist Wholesale strong,cost pressures impacting Retail and NZ margins. Guiding improving returns 2023-25.
• Breville Group Modest miss on top line, primarily driven by retailer de-stocking in Europe. Strong margins, cost management delivered EBIT +8% on p.c.p. Guidance for FY EBIT growth 5-10%.
• Carsales.com Strong result, with proforma revenue and EBITDA up 15% and 17% respectively. Positive backdrop, with improving inventory levels, yield increases and “good growth” in FY23.
• Commonwealth Bank Cash NPAT growth of 9% on stronger margins and decent volumes, offset by emerging credit costs. Executing well but flagged downside macro risks and intensifying competition.
• CSL In-line result, with strength in Behring (particularly IG and collections) boding positively, and
  Vifor deal tracking well after five months. Flagged improving margins and reaffirmed guidance.
• Goodman Group Good result in a tougher market, EPS up 10.7%, NTA up 6%, FY growth guidance upgraded to +13.5%. Unprecedented 99% occupancy, with rental reversions offsetting cap rate impact.
• JB HiFi Strong execution continues. Sales +9% on p.c.p., EBIT +14%, EPS +20%. Strong cashflow, net cash. Market estimates are for sharply lower sales and margins to moderate.
• James Hardie Weak 3Q result as macro conditions drove softer volumes (-11%), sales (-4%) and EBIT(-16%). Addressing cost base and manufacturing patterns but committed to 25%+ margins.
• Netwealth $5b net inflows, FUA +10% on p.c.p. to $62b. Revenue +19%, EBITDA +10% given high reinvestment. Rising cash margins, moderating reinvestment to aid earnings leverage.
• Pinnacle Investment Missed expectations. Net outflows, FUM -1% on p.c.p., performance fees lower in weaker markets, negative operating leverage. Strategy / model intact, leverage to better markets.
• QBE Strong result, beating expectations with 13% premium growth, better expenses and
  rebounding investment yields. Upbeat FY23 guidance, targeting mid-teens ROE.
• REA Group is broadly in-line (NPAT down 9%), but 5% revenue growth is largely price-driven as listings dry up due to macro uncertainty. Looking through cycle with Indian investment to continue.
• ResMed Inc Q.2 result largely in line. Revenues +20% on p.c.p. as device growth continues to improve. Higher than expected costs, FX impacts restrained earnings growth to +13% on p.c.p.
• Transurban EBITDA slightly light but solid free cash flow drove an upgrade to FY23 DPS guidance. CEO leaving after 11 years. Strong toll escalation, West Gate tunnel de-risking are positives.
• Vicinity Group Overall beat, with income up 21% as strong retail conditions underpin leasing conditions. Upgraded guidance potentially conservative but low gearing reflects caution on consumer.
• Wesfarmers Beat expectations, NPAT +14% on p.c.p. Bunnings resilient, Kmart strong, commodity prices aid Chemical/Energy/Fertilisers. Catch losses disappointed. Lithium project delayed 6 mths
• Whitehaven Coal Pre released. Ave price in H.1 A$552/t v costs A$96/t = printing money. Coal price retraced recent mths – where to now ? NSW Govt coal reservation policy to impact <5% of production.

MAJOR SHARE PRICE MOVES - S&P/ASX 200

• GUD Holdings +20.0% H.1 earnings above market estimates, with solid growth in automotive segment, stable margins, de leveraging on track, Q.4 price rises, Jan-23 trading solid
• Orora +17.5% H.1 result demonstrated resilience. Stock had de-rated since Aug-22 result, so a
  better than feared US result, maintenance of FY guidance was received well
• Sonic Healthcare +16.2% Revenue -15% on p.c.p. (EBIT -40%) as -72% decline in Covid revenues offset +6% in base business. Jan-23 base business +14% on p.c.p. Short covering
• Lake Resources -13.0% No company specific announcements. Lithium related stocks all softer across the week as Chinese Lithium carbonate/hydroxide prices continue to drift lower
• AMP Limited -14.8% F.22 result well below consensus. Margins, costs and net flows in the wealth management business all disappointed versus market expectations
• Star Entertainment -20.5% F.23 guidance for $330-360m EBITDA >20% below consensus estimates, with Star Sydney the key variant. Several moving parts. Gearing a focus for market.

You may also be interested in...

Follow us