Switzer on Saturday

The Yanks will cut in September and stocks will love it!

Founder and Publisher of the Switzer Report
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Friday on Wall Street confirmed what I’ve been expecting, with clear signs that the rally in stocks was broadening to other sectors. What was also heartening was the rise in the Nasdaq after a near 2% dumping on Thursday. Recall that both the S&P 500 and the Nasdaq have risen strongly for more than a year, but they have been driven by basically seven stocks.

For some time, I’ve argued that when the US saw it was more than likely that interest rates will be cut, we’d see interest-rate sensitive growth stocks benefit. That would include other tech stocks that were seen as beneficiaries of lower rates.

I’ve often referred to the ‘other’ 93 stocks in the Nasdaq 100 that underpins the ETF called HNDQ. HNDQ has spiked 26.78% over the year, so on Friday (our time) I checked out the ‘other’ 93 stocks. And yes, many of them rose as the money market gave out a 93% chance of a rate cut in September!

What we’ve seen overnight is that this belief in a big rotation ultimately caused by lower rates will help sectors and companies that have struggled in the recent past. Ahead of Wall Street’s closing bell, real estate, industrials and materials were popular and so were utilities as these compete with interest rates.

All we need here are some signs that our inflation is starting to fall, and then we’ll get a bigger uplift in stocks. That said, we did get a 0.88% rise on our market yesterday, showing that as long as our inflation story doesn’t get out of hand, we’ll see our market indexes rise from the updraft from what happens on US market indexes.

So, what are the other big Wall Street take-outs from the past two days, following the June fall in the CPI in the US by 0.1%?

Well, we’ve seen small caps take-off, as smarties sold off their big tech winners (it’s called profit-taking). The Russell 2000 small-cap index is up over 5%! In fact, the other three indexes (the Dow, the S&P 500 and the Nasdaq) had strong Fridays, with rises close to 1%.

Interesting, a UBS report pointed out that when the US stock market in the past has hosted a rotation that’s good for small caps, the associated rally historically has lasted for around four weeks.

This from David Russell, global head of market strategy at TradeStation, is a net summary of what the market likes right now:

“The powerful growth story in AI has been all-consuming, but it’s not the only story. Powell’s testimony this week and the CPI report remind investors that other catalysts can boost other kinds of companies. That’s especially true for a sector like utilities (this week’s leader), which emerged as an artificial intelligence (AI) play earlier this year and now can potentially benefit from rate cuts.”

So, a boring sector like utilities, which is often seen purely as an interest rate proxy play, now has AI ‘legs’ helping their share prices run faster! This is why this current rally, while vulnerable to short-term selloffs, looks to have time to keep going higher.

Amidst all this good news for stocks, there was one less bullish sign for rate cuts. That sign was the headline number for the Producer Price Index (or PPI). It did rise by 0.2% in June but it’s only up 2.6% for the year compared to the CPI, which is up 3%. “There does not appear to be much inflation pressure percolating on the factory floors that might affect the prices that consumers pay at the shops and malls,” said Christopher Rupkey, chief economist at FWDBONDS to reuters.com, after the numbers were released.

Importantly, all the good vibes out of the New York Stock Exchange have set us up for a big positive day for our market on Monday, with the SFE SPI 200 Index expected to open over 50 points.

To the local story last week and the S&P/ASX 200 added a nice 1.75% over the five trading days, to finish at 7959.30, which was a 137-point gain. Not bad for an economy that might have to wait until early 2025 to see the first rate cut or could actually face a rate rise!

The table below shows how many of the well-supported stocks have fared, but the following had starring roles on the market this week:

  1. Cettire became the second most-shorted stock but gained 6.34% for the week! This is down 51.2% for the year, so maybe the bargain hunters are at work.
  2. Shares in Insignia Financial tumbled 8% earlier in the week (the AFR reported), after the company denied tapping Citi bankers as private capital firms weigh its potential as an M&A target. It ended the week up 5.36%.
  3. Bell Financial rose 1.07% on a revelation that profit was up 47%.
  4. The AFR reported: “Stockbroker Wilsons Advisory is betting that Guzman y Gomez’s shares will rally more than 10 per cent over the coming year as its ambitious store rollout strategy fuels “significant and sustained earnings growth”. The stock was down 3.68% for the week.
  5. Telstra put on 2.96% to $3.82 after announcing it would increase the price of its mobile plans.
  6. Bapcor was up 1.59% for the week despite rejecting a $1.83 billion buyout offer from Bain Capital.
  7. REA put on 3.05% for the week, in a good week for property. In case you missed it, this stock is up 37.45% for the year!

What I liked

  1. The US CPI news, the Fed reaction and the money market tipping a rate cut will come in September.
  2. The PPI news.
  3. This from AMP’s Shane Oliver: “The fall in US inflation and the RBNZ’s pivot are positive signs for the RBA. Of course, Australian inflation and the RBA don’t always just follow other countries, but Australia was part of the global upswing in inflation (and hence rates) and there’s no reason to expect it to be radically different on the way down, particularly with wages growth here not reaching the level of other countries”.
  4. The failure of the far right in France at the recent election, though the far left could be a problem!

What I didn’t like

  1. Global shipping costs have surged this year primarily on the back of ships being forced to go around Africa rather than through the Suez Canal (adding two weeks to a normally four-week Rotterdam-Singapore voyage).This isn’t great for our inflation statistics.
  2. Chinese CPI inflation slowed to 0.2% year-on-year in Junefrom 0.3% year-on-year in May, with producer price inflation rising to minus 0.8% year-on-year from minus 1.4% year-on-year.These guys need inflation!

Local inflation and the Houthi pirates

Houthi pirates of the Horn of Africa have been attacking ships coming out of the Red Sea, so ships are now “going via the Cape” (i.e. the Cape of Good Hope). But this detour has added two weeks to the trip for exports from Europe, the UK and so on. This is adding to costs, so see my Switzer Daily story on this subject.

(https://switzer.com.au/the-experts/peter-switzer/inflation-falls-in-the-us-as-our-cpi-could-be-on-the-rise/ )

However, AMP’s Shane Oliver has put the threat of the pirates to our CPI into perspective with the following: “All up, the rebound in shipping costs is certainly a threat, but the boost to inflation is unlikely to have a huge impact on central banks’, including the RBA’s, interest rate policies. But it’s a risk worth watching”.

I hope he’s right because I want to see a surprise fall in inflation ASAP to bring a strong rally to local stocks.

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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 

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This is a “Yahoo!!!” revelation with US inflation for June down 0.1!


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