The ASX200 eked out gains last week despite stronger-than-expected jobs data raising expectations the RBA will hike again in August. Beaten-down financials helped the index, gaining 2.7% for the week, whilst the materials sector struggled, with lithium stocks tumbling as China’s first futures for lithium sank on Friday.
It’s a huge week for investors – it arguably doesn’t get much bigger than this. Locally, we see quarterly CPI and retail sales, two major deciding factors in the RBA’s next move. Three major central banks are also handing down rate decisions; the Federal Reserve, Bank of England and Bank of Japan. To cap all of that off, we’ve got around 40% of the S&P500 reporting earnings with four of the magnificent seven; Alphabet (GOOG), Amazon (AMZN), Microsoft (MSFT) and Meta Platforms (META), all due this week.
Although tech earnings will be the retail investor focus, the Fed may steal the show. US stocks are trading close to record highs, with inflation easing and investors believing the Fed’s massive tightening cycle is winding down. Although a 25-bps hike is almost guaranteed this week, Jerome Powell’s press conference will be the focal point. Powell will likely reiterate once again that there is still work to be done to tame inflation and the labour market’s resilience may see him keep his hawkish rhetoric. Any further hikes than Wall Street currently expects, though, is bad news for markets, especially tech stocks.
3 things that happened last week:
- Australian Unemployment points towards another hike
Australia’s labour market showed further resilience last week, with employment beating expectations and unemployment coming in at 3.5%. This comes despite rising population growth rising in since the pandemic. Labour force participation remains at a record high, and the unemployment rate remains close to a 50-year low. Whilst this is good news for consumers, this is not good news for the RBA, who are worried about above-average increases in prices and wage spirals under such levels of labour market tightness. This latest release could add to the likelihood of the Reserve Bank raising the cash rate again in August after leaving rates on hold in July
- US Tech Earnings Disappoint
Tesla (TSLA) and Netflix (NFLX) kicked off tech earnings last week and disappointed Wall Street. The results weren’t terrible, but they didn’t impress, especially after both stocks have seen huge gains so far in 2023. Netflix added a huge number of subscribers at 5.89 million, well above the 2 million expected and up from the 970k loss in the same period last year. Tesla set record quarterly revenue, with 47% growth, and earnings beat expectations. But, this earnings season, it’s all about the finer details and near-perfect results. Netflix’s sales growth was slower than expected, and its outlook for Q3 was below estimates, whilst investors fretted over Tesla’s falling margins.
- A winner and loser last week from the S&P/ASX200
Flight Centre (FLT) was a winner on the ASX last week, with shares climbing by 10.5%. The travel agent updated its full-year guidance with EBITDA expected to grow between $295 million to $305 million.
It was a miserable week for Ansell (ANN) investors as shares fell by 13.7%. On the contrary to Flight Centre, Ansell gave a disappointing trading update with costs expected to accelerate in the months ahead.
3 things to watch for the week ahead:
1. Australian Quarterly CPI – Is inflation cooling?
After inflation significantly declined in June to 5.6% from 6.8%, the RBA kept rates on hold in July. This week sees the release of the quarterly CPI, which gives a more accurate reading of inflation in Australia and therefore, clearer data for the RBA to plot its next move. The average consensus from Bloomberg is that the quarterly CPI reading will decline to 6.2% from 7% in Q1 but similarly to the monthly readings, the consensus is broad; ranging from a low of 5.8% to a high of 6.7%. After last week’s employment numbers showed further resilience in Australia’s labour market, anything but reading under consensus at 6.2% would likely solidify another rate rise from the Reserve Bank next month. It would be surprising not to see at least one more hike from the RBA in its current cycle, with the threat of entrenched inflation still a clear worry for the board (something it noted in recent minutes) along with further evidence last week of a labour market that doesn’t look set to cool any time soon. There’s no doubt this impending data will be a market mover in the days ahead and may set up another volatile week on the ASX.
2. Rio Tinto Half-Year Results
China’s faltering economic recovery is impacting many sectors globally, but miners such as Rio Tinto (RIO) are feeling the full impact of weaker demand from the world’s largest iron ore importer. A second-quarter production update last week showed its shipments fell by 1% from a year earlier, which could have an impact on its half-yearly results this week. It wasn’t all bad news, however. Rio still expects full-year iron ore shipments at the upper end of its guidance, which could soften the blow for any weakness in its half-year results announcement this week, if its outlook is positive. Strength from Q1, when iron ore prices rebounded from 2022 lows, may help to offset its disappointing Q2 production. The expectation is that EBITDA will jump by 17% this week from its H2 2022 results to $12.5 billion. Unfortunately for investors, that still may not be enough to stop the miner’s typically impressive dividend from being trimmed.
3. A big week for big tech
Earnings weeks don’t get much bigger than this, with Microsoft, Alphabet, Amazon and Meta making up over 10% of the S&P500. After a poor start from Tesla and Netflix last week, investors will be eagerly awaiting more upbeat numbers from some of the world’s biggest names to ensure the tech rally doesn’t fade. Last week has taught us that anything but a near-perfect report will be punished, given tech’s colossal rally and higher valuations. AI will most likely take centre stage once again, with Microsoft set to be front-and-centre as a leader in the AI space, thanks to its stake in ChatGPT creator OpenAI. However, Wall Street will want to see the tech giants starting to convert this innovative technology into revenue.
Meta may be the standout, with earnings expected to grow year-over-year for the first time since Q3 2021. This, combined with the Q3 2023 launch of its new ‘Threads’ platform, which earned 100 million new users in five days, making it the fastest-growing app of all time, could boost Q3 guidance for Meta. This level of success bodes well for the company as it seeks to turn around public sentiment following its patchy foray into the VR app space with the ill-fated ‘Horizon Worlds’.
The bottom line is that results need to be solid– and outlooks will be just as important. Big Tech has the potential to keep outperforming, particularly with AI tailwinds, but it certainly won’t be without its challenges.
For more on the week ahead, and a review of Tesla and Netflix’s earnings, take a listen to the latest Market Bites episode on Digest and Invest by eToro
*All data accurate as of 24/07/2023. Data Source: Bloomberg and eToro
Disclaimer:
This communication is general information and education purposes only and should not be taken as financial product advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial product. It has been prepared without taking your objectives, financial situation or needs into account. Any references to past performance and future indications are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.