The ASX200 finished 1.56% higher last week, led by utilities and energy. US Stocks also finished higher, with the S&P500 up 1.85% as rate cut expectations ticked higher. US earnings also helped drive stocks, reporting 5.5% growth for the quarter.
Chinese inflation picked up to 0.3% from a year earlier, steering away from deflation territory. But, the producer price index fell 2.5%, a bigger-than-expected fall, squeezing company profits, and making them reluctant to invest.
Disney shares had their worst day in over a year, falling by 9.5% on Friday despite reporting a profit for its streaming business for the first time. Investors hit sell over fears its Direct-to-Consumer business may see losses widen.
Australia’s Budget is in the limelight this week, expected on Tuesday night. It’s expected that we will see a second consecutive budget surplus thanks to strong commodity prices, with the government’s books coming in at AUD$11 billion
3 things that happened last week:
- RBA Keeps rates on hold
Last week, the RBA left rates unchanged as expected, ut the surprise was that we didn’t get the stern hawkish tone that was expected by many. Yes, the RBA’s language was more hawkish than its previous statement but in no way does it point towards a tightening bias and is instead firmly neutral. The board highlighted inflation easing, but at a slower rate than they had expected, and therefore are ‘remaining vigilant to upside risks’. That’s seen the RBA revise its inflation forecasts higher while lowering its unemployment projections. This has trimmed down expectations of another hike, which have been brought to the fore in recent weeks, but reaffirms that rates will stay higher for longer and, therefore, the RBA will continue to stand pat for clearer progress on inflation in the months ahead. We would have to see inflation seriously stall for the RBA to reignite its hiking bias from here.
- US Earnings season reigniting the rally
It’s been a good US earnings season so far, with a few names left to report and importantly, Nvidia. Growth is at over 5.5%, which is better than many had expected going in. We’ve got every sector on the S&P500 ahead of analyst forecasts, and we’re now seeing analysts increase their earnings estimates for the second quarter, the first time we’ve seen that since 2021. The magnificent seven have once again been a standout, growing earnings by 36% so far, despite weaker earnings from Tesla.
- A winner and loser last week from the S&P/ASX200
Liontown Resources won the week up more than 14% after a number of broker upgrades.
However, Sims shares slipped more than 8% for the week after downgrading its earnings guidance for FY 2024.
3 things to watch for the week ahead:
- China Tech Earnings (Alibaba + Tencent)
Despite facing a challenging regulatory landscape in China, Tencent Holdings Ltd. and Alibaba Group Holding Ltd. are poised to showcase their resilience in their upcoming earnings reports this Tuesday. The Chinese government’s shift towards supporting overseas listings and funding for tech firms marks a turning point, reflected in the companies’ increased share buybacks to boost shareholder returns.
Alibaba’s anticipated modest growth in the last quarter amidst domestic e-commerce market headwinds and slower cloud business expansion. Despite these challenges, both companies present attractive valuations for contrarian investors amid their recent struggles.
Looking ahead, Alibaba’s strategic vision under CEO Eddie Wu to evolve into an open tech platform for AI innovation across various industries offers a glimmer of hope. Similarly, Tencent’s global launch of TanLIVE, a climate community platform aimed at promoting carbon neutrality, signifies a proactive stance amidst industry shifts.
With lower valuations and rising earnings expectations, a strong performance in the upcoming earnings reports could provide much-needed momentum for these tech giants in the market.
- US Inflation
With US CPI data for April on the schedule for Wednesday US time, analysts anticipate a downward trend in inflation, marking a pivotal moment in the economic landscape. The Fed’s stance on interest rates remains the same, holding steady at their highest level in two decades as it aims to rein in inflationary pressures.
Despite the Fed’s confidence in returning inflation to target by 2026, recent unexpected economic resilience raises questions about the tightness of current monetary policy. Past trends reveal the Fed’s optimistic outlook on achieving inflation targets within a few years, yet recent inflationary spikes have disrupted expectations, delaying potential rate cuts.
The upcoming CPI reading carries significant implications, especially amidst anticipation of a rebound in inflation. While markets initially eyed July for potential rate cuts, the outcome of this week’s data could alter this trajectory.
Despite challenges in curbing inflation, Fed Chair Jerome Powell reiterates the importance of clear signals before adjusting rates, underscoring the cautious approach that has defined his time at the helm recently.
Inflation potentially easing in April could sway the Fed’s decision-making, possibly putting rate cuts back on the agenda. While energy price surges may impact headline inflation, mitigating factors such as slowing rent growth and declining used-car prices could also temper core inflationary pressures.
- AU Unemployment
The latest unemployment figures will be released this Thursday against a backdrop of data that has indicated good news for the RBA in its fight against inflation, but a bleak update for the increasing volume of job hunters across the country.
Over at the RBA, the board recently highlighted that inflation is easing but at a slower rate than they had expected, and are therefore ‘remaining vigilant to upside risks’. That’s seen the RBA revise its inflation forecasts higher while lowering its unemployment projections.
This past Wednesday, Seek released labour market data, revealing that the number of job ads plunged 4.7% in April to the lowest level since January 2021. It’s likely that we will see a climbing unemployment figure that echoes this movement.
With the Federal Budget to be delivered on Tuesday night and Treasurer Jim Chalmers confirming that jobseeker payments will not receive a bump, there is plenty of concern – especially with an increase in the rate of business insolvencies further tightening the jobs market this year.
While much of this is usually good news when trying to fight inflation, the issue is proving sticky and interest rate cuts still seem a long way off if there are no meaningful concessions for hard-done-by workers in this week’s budget.
*All data accurate as of 13/05/2024. Data Source: Bloomberg and eToro
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