Switzer on Saturday

Headline: The rally looks done, but it rides again but when?

Founder and Publisher of the Switzer Report
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A recession spooked Wall Street did not get the news it needed with the jobs report apparently coming in worse than expected, which sent stocks down and especially the big tech juggernauts that have been driving US stocks up, which in turn has buoyed global market indexes, including our own. However, Monday is set to be a bad one, with the SPI futures pointing to a negative 100-point fall at the open for the S&P/ASX 200.

All four US market indexes are down solidly with the Nasdaq off over 2%.

This is the September volatility I’ve been warning about and now the big influencers of US stocks will sweat it out, surveying other economic readings to see if a recession is looming, while waiting for the Fed rate cut on September 20. Between now and then the big question on share players’ minds will be — will the cut by 0.25% or 0.5%?

The first was highly expected, but given this jobs report, a 0.5% rate reduction can’t be ruled out. Importantly, this kind of cut could either be seen as a great boost to a flagging economy or a confirmation that the Fed is worried about a recession. The latter would be bad for stocks in the short-term but after that stocks would surge on low rates.

For the history buffs, Deutsche Bank strategist Jim Reid has reported the following on the Fed’s recession record: “Not every Fed hiking cycle leads to a recession, but all hiking cycles that invert the curve have led to recessions within 1 to 3 years.”

And yep, the US bond yield curve has been inverted!

I have always argued that the US rate cuts will keep me long stocks into 2025 but some time next year I would start to become more defensive and income-chasing. I still hold that view.

So, what happened with the jobs report, which did not look as bad as the market thought, yet it led to a big sell-off.

Nonfarm payrolls expanded by 142,000 during the month of August, which was up from 89,000 in July, but it was below the 161,000 consensus forecast from the Dow Jones survey of economists.

On the less worrying side, unemployment actually fell from 4.3% to 4.2%, but not helping were two months of substantial downward revisions, with the statistician cutting July’s total employment rise by 25,000, while June fell to 118,000, a downward revision of 61,000.

The focus will now go on jobless claims data and BMO Wealth Management Chief Investment Officer Yung-Yu Ma explains why: “That’s more of a forward-looking indicator. As long as those stay low — people have jobs, people remain confident in the ability to find jobs or comfortable in the jobs that they have — we think that they will continue to spend. So as long as those numbers stay low, if we get some blips in the overall monthly jobs report that shows weakness on the edges, we’re not quite as concerned.”

Given disappointing manufacturing numbers for the US this week, these job report readings have not shored up confidence.

“I don’t like this a whole lot. It’s not disaster, but it’s below expectations on the headline, and what really bothers me is the revisions,” said Dan North, senior economist for North America at Allianz Trade to CNBC. “This is certainly going the wrong way.”

That said, the wage story is not looking terrible, just subdued. Average hourly earnings increased by 0.4% on the month and 3.8% from a year ago, both higher than the respective estimates for 0.3% and 3.7%. Hours worked nudged higher and all up I think the Yanks are overreacting, but only the novice stock player would be surprised to hear that!

I’m expecting to see more volatility between now and the September rate cut and possibly rolling into the US election in the first week of November.

To the local story and banks keep surprising to the high side helping the S&P/ASX 200 Index add 0.4% or 31 points, to 8013.4, but it was a loser week with the overall market down 78 points or 0.97%.

Stars this week:

  1. Orora rose 6.5% to $2.62 after announcing it was selling its North American business for $1.8billion.
  2. Nanosonics was up 10.22% to $3.56.
  3. CBA up 2.96% to $143.47 for no good reason!
  4. NAB +2.55% to $39.05 and ditto for the reason!
  5. Macquarie wacked on 4.93% to $225.17 but at least it sold a business for $24 billion which it owned a big chunk of!
  6. NextDC continues to ride higher, up 4.94% to $17.63.

Strugglers this week:

  1. Coronado Global Resources slumped 24.16% to 89 cents after a bad outlook briefing.
  2. Pilbara Minerals was crunched down 16.03% to $2.41 and a 69% decline in revenue to $1.25 billion and an 84% drop in pre-tax earnings will do that!
  3. Fortescue lost 12.27% to $16.12 after a bad week for miners mixed with a dividend payment.
  4. Challenger was down 9.7% to $6.24 after losing a big shareholder.
  5. Woodside was off 11.79% to $24.02 on lower oil prices and company specific issues.
  6. BHP was off 5.62% to $38.45 with iron ore prices and Chinese data not helping.
  7. GQG, the fund manager market darling, lost 8.66% to $2.48.

What I liked

  1. This from NAB’s economics team: “Q2 GDP confirmed growth was soft, but we continue to expect the first half will have marked a trough, even if we are less optimistic than the RBA about how quickly growth will pick up.” (This helps the rate cut case.)
  2. The monthly Melbourne Institute inflation gauge slowed further in year-on-year terms, to 2.5% from 2.8% last month, in line with an expected further deceleration in inflation.
  1. The monthly household spending indicator, the ABS’s new alternative measure of household spending (which is broader than the retail data) rose by 0.8% over the month of July, or 2.9% over the year. This is stronger than the indicator from retail sales but, in real terms, this is around flat compared to a year ago.
  1. Services activity is propelling the US economy, with the services ISM lifting marginally to 51.5 in August (from 51.4 last month), a touch above expectations.
  2. For China in August the manufacturing PMI improved, rose to 50.4 (from 49.8 last month) and better than expected, while services softened a little to 51.6 (from 52.1) last month. Both indicating expanding activity, in contrast to some of the doom and gloom surrounding the Chinese economy.

What I didn’t like

  1. RBA’s Michele Bullock didn’t shift her messaging at Tuesday’s board meeting press conference, noting the board needs to see the results in inflation before thinking about reducing interest rates.
  2. The CoreLogic series onhome prices, rose by 0.5% in August or 7.1% higher than a year ago and this madness of price rises has to stop!
  3. Australian housing lending rose by 3.9% in July (well above estimates of a 1% rise), with a 5.4% increase in investor loans, 2.9% for owner-occupiers and 0.8% for first-home buyers. Despite the affordability challenges in the market, there is still demand for home loans in Australia. The RBA won’t like this!
  4. Oil prices fell further this week, with WTI below $70/barrel. This is good for inflation but implies a slowing global economy is being factored in, rightly or wrongly.
  5. The ISM, a measure of business conditions alongside the PMI (the ISM is considered a broader measure, and also has a longer time history) rose to 47.2 in August (from 46.8 last month), which was slightly below expectations and is still consistent with contracting manufacturing activity.
  6. The US Fed’s Beige Book found nine out of 12 Fed districts reported flat or declining activity and was up from 5 last month.

Will the RBA learn from the Fed?

With US markets now seriously anticipating a 0.5% rate cut following these job statistics, it shows central banks have a tendency to overtighten and aren’t good at easing back wisely to avoid a recession. At least our RBA has avoided a lot more recessions compared to the Fed, but considering the slowdown economic readings we’ve seen recently, the economics teams at the CBA and Westpac could be proved right with their forecast that we will see the first rate cut later this year.

Switzer This Week

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The Week Ahead

Top Stocks — how they fared

Most Shorted Stocks

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before 

 

Observation of the Week

This is from AMP economist Diana Mousina: “Annual GDP growth of 1% is very poor for Australia, especially as our population is growing at over 2% per annum. GDP growth has slowed over the past 3 decades, from 3.4% in 1991-2000, 3.1% in 2001-2010 and 2.4% in 2011-2020. While our forecast of GDP was in line with the actual outcome, there was some components in the data that surprised us. Household spending was even weaker than we expected, falling by 0.2% over the quarter (and subtracted 0.1 percentage points from GDP growth). This was the largest decline in consumer spending since the GFC (outside of the pandemic).”

(I say, I hope the RBA notes this, as consumer spending is a big driver of inflation.)

 

Chart of the Week


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Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.