Weekly market update - 29th of May 2023
Written and accurate as at: May 29, 2023 Current Stats & Facts
The local market moved lower through the week, dragged by Consumer Discretionary (-3.1%), Resources (-2.8%), REITs and Banks (-1.8%). The Tech sector was higher (+4.7%), taking a solid lead from the US despite their differing exposures.
Tech/semiconductors and all things AI were the flavour of the week in the US, following a strong result and guidance upgrade from NVIDIA, which saw the stock +25% for the week. Significant tech outperformance led the cap-weighted S&P 500 to outperform the equal-weighted benchmark by over 150 b.p. The S&P 500 was +0.3%, whilst the NASDAQ was +2.5%.
Ahead of the Memorial Day weekend, the S&P 500 was +1.3% on Friday, with the S&P/ASX 200 futures pointing to a +1.0% start to our week here in Australia. The announcement over the weekend of an in-principle deal to raise the US debt ceiling will likely provide further support to our market today.
Current Market Trends and Key Influences
Central Banks' Response to Inflation and Impact on Interest Rates
Recent data from the UK and the US indicate that economies have demonstrated greater resilience to elevated interest rates than initially predicted. This outcome has reinforced the expectation that central banks may need to implement additional measures to curb inflation. Over the past week, two-year treasury yields experienced an increase in the UK, US, and Australia by 48 b.p., 28 b.p., and 10 b.p., respectively.
The RBA and Domestic Retail Sales
Regarding domestic retail sales, the Reserve Bank of Australia (RBA) has not reacted significantly to the data released during the week. The RBA previously observed a decreased consumption growth and anticipated a continuous sluggish pace. The recent retail sales data aligns with this prediction, offering only a partial view of consumption and not including most service activity.
US Corporate Profits: Q1 Performance
According to the U.S. Bureau of Economic Analysis, corporate profits in the US (not to be confused with listed company earnings) exhibited a decline of 6.8% in Q1 2023, amounting to USD 2.31 trillion, compared to Q4 2022. This marks the most significant fall in corporate profits since Q1 2020 when a 7.4% decrease was recorded. Compared with the corresponding period from the previous year, earnings for Q1 are down by 2.8%.
The Future of Policy Tightening: Views from US Fed Officials
US Fed officials have expressed uncertainty about the extent of future policy tightening required. Minutes from the May Federal Open Market Committee (FOMC) meeting reveal a focus on retaining optionality. Some participants noted that further policy tightening may not be required if the economy follows its current projections. However, other participants argued that additional policy tightening would likely be necessary if the rate of inflation returning to 2% continues to be slower than acceptable.
Macro/Economic Newsflow
Performance of Australian Retail Sales and PMI
Australian retail sales remained static in April, with a year-on-year increase of 4.2%, falling short of the predicted growth of 0.3%. Excluding food, sales rose marginally by 0.1% against March levels. Household goods experienced a continued decline in spending, albeit partially offset by a rise in clothing sales, assisted by cooler-than-usual weather.
The Australian Services PMI recorded a value of 51.8 in May 2023, marking a decrease from the previous month's value of 53.7. This reflects the second consecutive month of expansion in the Australian service sector. On the other hand, the Manufacturing PMI remained stagnant at 48, indicating a third straight month of contraction in the manufacturing sector.
US PMI Data Indicates Expansion
US PMI data revealed a steady expansion in the private sector. The service sector growth hit a 13-month high while manufacturing PMI declined to 48.5 in May from 50.2 in April. This suggests the most significant contraction in the manufacturing sector in the last three months. However, the Services PMI increased to 55.1 from 53.6 in April, marking the fastest growth rate over a year.
UK and Eurozone PMI Performance
In the UK, PMI data for May showed a decline in manufacturing output for the third consecutive month. This contraction was juxtaposed with a slight decrease in the services sector, primarily due to budget constraints, escalating costs, and increasing interest rates.
The Eurozone Composite PMI dropped to a three-month low of 53.3 from 54.1 in April, with the private sector witnessing growth for the fifth consecutive month. The services sector remained sturdy, but manufacturing activity contracted.
UK Inflation Rate
In April, UK inflation reduced to an annual rate of 8.7%, the lowest since March 2022. This decline was primarily due to a sharp deceleration in electricity and gas prices, yet it exceeded market predictions of 8.2%. Core inflation, which excludes food and energy, rose to 6.8%, marking its highest since March 1992 and significantly surpassing the forecast of 6.2%.
Major Share Price Movements – S&P/ASX 200
Among notable movements in the S&P/ASX 200, Megaport experienced a surge of 24.4% mid-week, following a tech stocks rally in the US and a broker upgrade on Friday. Polynovo Ltd saw an increase of 10.3%, attributed to a change in outlook towards longer-dated growth stocks, while TechnologyOne Ltd outperformed after a strong 1H result exceeding analysts’ revenue forecasts.
In contrast, Syrah Resources hit a new 52-week low, experiencing a decline of 12.2% amidst negative sentiment around short-term supply and demand dynamics in the Chinese battery market. Lake Resources and Lovisa Holdings saw share prices fall by 15.1% and 15.2%, respectively. The former suffered due to negative sentiment around lithium investments and increasing short interest, while the latter faced investor selling in discretionary retail as a couple of smaller peers reported softer demand from younger consumers.