MACRO signals were slightly softer last week, easing concerns about excess growth.
Fed chair Jerome Powell could have been seen as a touch hawkish in a speech at the annual Jackson Hole retreat last week.
But a careful reading indicates he is not expecting an economic re-acceleration which would necessitate further rate hikes.
People are still looking for further stimulus from China, but none is yet forthcoming.
In the US, AI chip maker Nvidia — which triggered the June quarter rally — reported its Q2 results and again blew away expectations.
But this time the stock stalled and did not fuel a NASDAQ rally — hindered perhaps by fuller valuations and the overhang of bond yields.
All combined, the market squeezed a little higher, with the S&P 500 up 0.84%, and bonds stabilising.
The S&P/ASX 300 fell 0.39% in what was the busiest week for company reporting, with substantial variations in stock performance.
The underlying theme is the economy seems fine and earnings are largely holding up for industrials.
While there are pockets of weakness in certain retail categories, these are outweighed by positive signals in travel, commercial demand and building materials.
There are no signs of recession and — with rates on hold — it is hard to see what would trigger one.
The only issue is at some point inflation trends may force the Reserve bank to re-evaluate, but that remains a little way off.
Chair Powell projected a stern tone last week, speaking of maintaining restrictive policy until inflation got back to 2% — as opposed to the “2% range”.
The Fed chair said nothing to change the market’s view that there would be no hike in September, noting the Fed could afford to “proceed carefully”, while remaining prepared to move if needed.
He also noted lags in the effect of monetary policy and the risk of doing too much as well as too little.
All this points to the Fed probably believing it has done enough and can afford to wait to see whether the economy cools further or not.
Should the economy show signs of re-accelerating, it is clear hikes will be back on. But we are well away from that case.
The limited move in 10-year bond yields (-2bps over the week) indicates there is little change to market expectations.
Also speaking at the Jackson Hole conference, European Central Bank president Christine Lagarde struck a hawkish tone on medium-term structural issues.
Lagarde referenced potential supply shocks associated with the energy transition and its call on capital as well as geoeconomic fragmentation.
She also highlighted a labour supply issue, where workers wanting fewer hours could drive up real wages, leading to supply shocks and greater second-order effects. Though she also noted Artificial Intelligence technology could provide some offset.
These are longer-term issues and go more to the potential for rates to stay higher for longer and to stabilise at a higher rate than the previous cycles, rather than a short-term signal.
The poster child for the AI zeitgeist delivered well above market expectations, with Q3 guided revenue of $US16 billion — 18% higher than Q2 and 170% higher than the same quarter last year.
This was 27% ahead of consensus expectations and implied earnings per share (EPS) for Q3 was 39% ahead of consensus.
This is driven by Nvidia’s data centre business, which is closely leveraged to AI. Sales in Q2 were 29% higher than market expectations.
Management indicated they expect supply to improve sequentially through 2024, suggesting they are avoiding bottlenecks holding back their growth.
The market is revising earnings upwards substantially on this theme.
Goldman Sachs, for example, raised its data centre revenue estimates 58% for FY24 and FY25 and EPS estimates by 55% and 52% respectively.
The chip-maker also announced a $US25 billion stock repurchase program, having done $3 billion in Q2.
The AI theme is alive and well and can underpin the broader ecosystem thematic.
While Nvidia’s stock was up 6% week-on-week, it fell back from the immediate post-result reaction.
This signal is worth noting. After a move of about 215% so far this year, it suggests positioning is now full and the earnings beat is helping sustain that, rather than drive it further.
A number of smaller US discretionary retailers put out negative news, signalling that trading conditions deteriorated from July to August.
Key points included the growing impact of theft and some signs of credit deterioration.
Dick’s Sporting Goods, Macy’s and Dollar Tree all fell sharply.
Previously signals from likes of Walmart and Ross Store had been more positive, so the full picture is still unclear.
This is worth watching as a possible change in trend.
Australian earnings season is painting a picture of an economy that remains in good shape with very little evidence of slowdown.
Qantas is seeing good travel demand. Wesfarmers has indicated no signs of weakness in Bunnings or K Mart.
Woolworths notes that demand remains decent, though there are signs of downtrading to cheaper items.
BlueScope Steel expects strong demand for building products through to year end.
Fuel retailers Viva Energy and Ampol are seeing strong commercial demand for fuel — and Domino’s is seeing signs of life in pizza demand.
Where there were poorly-received results, it was often company-specific such as Coles struggling with a surge in theft, Ramsay Health Care facing cost pressures, or Wisetech investing in new products.
There was also some offshore impact such as Reliance Worldwide’s exposure to the repair and remodelling market in North America and Iluka’s headwind from muted zircon demand in China.
The other feature of the current markets is the impact of prior investor positioning.
We are seeing unloved names performing well if there is no bad news (eg Altium and Domino’s Pizza) and well-owned names struggling if there is no new good news (eg Wisetech, Coles, Cleanaway).
The risk looking forward is whether waning momentum in revenues will leave companies exposed to ongoing cost pressures.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
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