Switzer on Saturday

Thank God the Fed has trumped inflation!

Founder and Publisher of the Switzer Report
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It’s fitting that on the week that the Yanks celebrate the ratification of the Declaration of Independence on 4 July 1776 that Wall Street celebrated with a winning week. And this comes as the Fed is being pressured to start cutting interest rates in September.

All big three market indexes ended in positive territories driven by a greater belief that many companies will see their share prices spike when rates come down. Remember, it was the raising of rates in March 2022 and the anticipation of it in December 2021 that started the slump in the S&P 500 and Nasdaq.

On CNBC, Professor Jeremy Siegel from the Wharton School of Business at the University of Pennsylvania (who I’ve regularly quoted to you as being one of the more market perceptive than most) is arguing that the US economy needs a September cut. Clearly, he knows that if rates remain at current levels for too long it will jeopardise the expected soft landing for the economy, which should underpin the next leg up for the stock market.

And his position on rate cuts was reinforced by the June Jobs Report that showed unemployment ticked up to 4.1% against a survey of economists that expected the jobless rate to hold at 4%. However, it was not all good news for those hoping for a rate cut ASAP, as the number of jobs created was a solid 206,000. But still the bond market celebrated by cutting yields, and it’s now tipping there’s a 77% chance of a September cut. Before this labour market data, it was a 64% bet.

Why? Well, CNN’s economic writers think the jobs report brings a canary in the coalmine!

You see, temporary help services employment dropped 48,900 in June and economists see this as good forward economic indicator, even though jobs data is seen overall as a lagging indicator. “If companies are growing, they’ll often get temporary help until they can hire for a full-time position; but if times are tougher, the temp workers usually are the first to go,” the CNN team explained. “Since 2022, the temporary help sector has added jobs in only four months; however, the drop-off in June is the biggest since April 2021”.

Chief global strategist at Principal Asset Management, Seema Shah summed up what the data is telling the market, with the following: “On one hand, the downward revisions to prior months and the rise in the unemployment rate raises the odds of a September Fed rate cut — bond markets are certainly celebrating this, but those same figures cannot help but prompt a twinge of concern about the direction of the U.S. economy. The broad host of economic data all point to a softening — today’s report adds to that picture.”

As per usual, the economy is posing more questions than it answers but the chorus is growing for a September rate cut. The Fed ultimately should follow the data, which has been Jerome Powell’s promise to the market and interest rate worriers, but he would be concerned about how Donald Trump would react to a cut that might help Joe Biden or whoever replaces him on the Democrat ticket!

The big watch for stocks this week is the inflation readings in the US that should help or hurt the chances of that September cut and, in turn, have a big impact on share prices.

Note the big donor Democrat billionaires are starting to withhold donations until Joe is replaced, with Abigail Disney (Disney heiress and daughter of Disney co-founder Roy Disney) suggesting Vice-President Kamala Harris as a better option, which will surprise many experts of US politics. The poll in November is set to be the huge story of 2024 and will be market impactful (see the latest view on Trump and the likely market reaction below).

To the local story and while Thursday and Friday were tough days for stocks, the week was positive, with the S&P/ASX 200 up 54.80 points (or 0.71%) to finish at 7882.30, which was a pretty good showing considering the black cloud of a possible rate rise hovers over the market.

Of course, helping is the better showing of inflation in the US and the expectation that rates cuts aren’t far off.

Happily, healthcare is starting to look perkier, with CSL, Cochlear and ResMed all finishing the week on the up. CSL was up 2.24% for the week, while ResMed sneaked up 0.07% but Cochlear lost 1.82% for the week, though it rebounded 1.03% on Friday.

On that same day, while banks and miners were out of favour, BHP was up 3.84% for the week and Rio added 2.81%. And true to form, Fortescue (FMG) spiked 4.28%.  Twiggy’s ‘baby’ rises and falls with an extra oomph!

The big improver for the week was Magellan, which gained 12.83%! Why? The AFR explained it this way: “Shares in Magellan rose another 4.7% to $9.50 to extend on a 6.1% gain on Thursday, after it posted flat inflows for the month of June in a sign the recent string of outflows from the investment firm were abating.”

Imagine if there was an announcement that financial advisers were back on board with the fund manager!

What I liked

  1. Talk that the Democrats are looking for a replacement for Joe Biden.
  2. The US Jobs Report and its implication for rate cuts.
  3. This from Shane Oliver: “Softish US economic data, cautious but dovish leaning minutes from the Fed’s last meeting and comments by Fed Chair Power that recent inflation data “suggest we are getting back on a disinflationary path” reinforced expectations for the Fed to start cutting in September.”
  4. And Shane Oliver believes rates have peaked!
  5. US job openings rose slightly in May and job quits were unchanged but the trend in both remains down,pointing to a weakening labour market.
  6. The fall in the US job quits rate, i.e., less people quitting jobs for new jobs, points to a further slowing in wages growth ahead.
  7. The weakness in consumer spending was also highlighted by the ABS Monthly Household Spending Indicator covering both retail sales and wider services for May, which slowed to just +0.1% year-on-year.
  8. Home building approvals for May bounced a more-than-expected 5.5% month-on-month, but this followed several weak months, mainly due to a 19.7% month-on-month bounce in normally volatile unit approvals. Much of the rise in house approvals was just due to Western Australia.

What I didn’t like

  1. The swing to the extreme right in France, which is spooking bond markets.
  2. This from Shane Oliver: “The minutes from the last RBA meeting provided no surprises but reiterated the RBA’s hawkish lean, with the implication that it would raise rates again if it judged that inflation would not return to target by 2026 and/or it concludes that demand is not falling enough relative to supply.”
  3. After two weak months, retail sales rose a stronger-than-expected 0.6% in June, but it was driven by bargain shoppers looking for discounts, which could help the inflation reading.
  4. CoreLogic home price data showed another lift in national average home prices of 0.7% in June, resulting in an average price growth of 8% through the last financial year. When will this house price madness stop?

Cramer on Trump

CNBC’s market guru Jim Cramer is insightful about how Wall Street sees the investing world. This is his take on a potential Donald Trump election victory. “If you think that Trump’s more likely to be president, the overall tone of the stock market will improve if only because the man can’t bear to see it go down, as the major averages are the barometer he uses to measure his own job approval,” he said. “You may think that’s insane, but it’s the reality, and if nothing else — hate him or like him – he’s good for your portfolio.”

Cramer reminded us that the Trump administration rarely tried to block mergers and the ex-President “supports gas and oil” but some companies could be losers if he goes ahead with promises to hit China with tariffs.

Just like the economy, once again the stock market with all its tailwinds and headwinds can pose more questions than it asks.

 

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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 

Quote of the Week

“Expect a rougher more constrained ride from shares, but with a still rising trend over the next 12 months…[but]]…the good news, though, is that central banks are getting back on track for more rate cuts which should boost growth expectations for 2025-26 and lower bond yields ultimately supporting share returns.” Shane Oliver, AMP.

Chart of the Week

Remember this — inflation down, interest rates down and stock prices up!


Disclaimer

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.