Switzer on Saturday

This week proved inflation is the main game for stocks

Founder and Publisher of the Switzer Report
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While the news on the Fed’s preferred inflation measure wasn’t bad, it wasn’t good enough to excite a market that could be over-excited, especially if the all-important readings on what’s happening to US prices aren’t screaming that rate cuts are imminent.

Before the closing bell, the Nasdaq was the only major index in the red, despite the fact that the inflation number from the Personal Consumption Expenditure price index (or PCE) for April actually came in at 0.2%, bang on what economists and the market were expecting.

Clearly, the market wants more progress, so it’s more believable that US rate cuts are closer rather than further away. Yep, this Nasdaq market response to an OK inflation statistic says the market is sick of slow progress and is worried that inflation is sticky around 3%.

To be accurate, the annual core PCE is at 2.8%, which was 0.1% higher than predicted, but it’s below the CPI, which last printed at 3.4%. Like us in Australia, that number was slightly up and higher than expectations. Also, it should be remembered that the Fed wants inflation at 2%, while our RBA will be happy with it in the 2% to 3% band. Our annual CPI on a monthly basis in April was 3.6% and stock and bond markets want to see progress in coming months or the recent excitement that pushed stock prices up will be adjusted down.

Dan North, senior economist for North America at Allianz Trade, summed up the PCE revelation and why the market has had a generally negative reaction. “The core index came in at 2.8%. That’s fine, but it’s been trading in a range for five months now, and that’s pretty sticky to me,” he told CNBC. “If I’m [Fed Chair Jerome] Powell, I’d like to see that start moving down, and it’s barely creeping… I’m not reaching for the Pepto yet, but I’m not feeling great. This is not what you want to see.”

Of course, statistics on the real-world economy seldom tell you the story you want to see when you want to see it, but big market influencers such as fund managers need to see inflation reduction progress probably over the next two months or they’ll take profits and stock prices will go down a level.

Here’s another market expert’s ‘take’ worth taking on board. “The PCE Price Index didn’t show much progress on inflation, but it didn’t show any backsliding, either. Based on the initial reaction in stock index futures, the market will see it mostly as a positive,” said Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley. “Investors will have to remain patient, though, [because] the Fed has suggested it will take more than one month of favourable data to confirm inflation is reliably moving lower again, so there’s still no reason to think the first rate cut will come any earlier than September.”

As the old song by Pyramid went “I can’t wait for September” but if we don’t see sufficient progress on the inflation-killing front, it will be short-sellers who’ll be celebrating and not us long-term players. We remain in a data drop drama, so the next big number comes next week in the US when the jobs report for May is released on Friday.

But it’s not all about the US and Wall Street, because we get the March National Accounts on Wednesday, which of course tells us how the local economy has been growing. The economists expect 0.2% growth for March, which isn’t flash, but if it’s lower than that, then economists calling for another rate rise will pipe down.

On the other hand, a better-than-expected reading won’t be good for interest rates and stocks, so I can’t wait for Wednesday!

Not to end this overnight summary on a negative note, this hasn’t been a “sell in May” month, with our market up 1.7%, while the US broader market rose 5.17% and the Nasdaq was up a whopping 7.24%, so a bit of profit-taking in the US doesn’t look crazy.

That said, we need to see that the central bank’s rate-rising efforts in the US and here in Australia need to show better inflation-falling results or this market optimism will be tested.

To the local market story, and it was a nice positive end to the week, with the S&P/ASX 200 index up 73.5 points (or 0.96%) to finish at 7701.70 but that still left us down 0.42% for the week, with US inflation fears and our own disappointing April CPI not helping.

Friday was good for Bega Cheese, Treasury Wine Estates and Woolies, with the cheese maker up 6.2% to $4.46, the winemaker jumping 2.8% to $11.33, while the grocery operator added 2% to $31.60.

Banks looked good on Friday but for the week they were mixed, with CBA and ANZ up around 0.5%, while NAB gave up 0.15%, and Westpac slumped 2.18%. (Check out the weekly summary of top stocks below.)

Telix shareholders saw a 15.3% spike to $18.15 after a thumbs up from Wilsons. Meanwhile, Adbri’s board gave a positive reaction to the CRH $3.20 offer a share and Citi put a buy recommendation on BHP.

What I liked

  1. Retail sales rose a less-than-expected 0.1% in April after a 0.4% fall in March. This helps stop the RBA from raising rates.
  2. March quarter construction unexpectedly fell sharply. Falls were broad based across home building, non-residential construction and engineering. This is another reason to stop the RBA from raising rates.
  3. Business investment rose 1% quarter-on-quarter in the March quarterdriven by non-mining equipment, which helps us avoid a recession.
  4. Continued weak housing approvals point to weak ongoing residential homebuilding, which is another stopper on the RBA to raise rates.
  5. This from AMP’s Shane Oliver, despite the CPI number this week: “We continue to see further gains in shares this year as disinflation continues, central banks ultimately cut interest rates and recession is avoided or proves mild, but the risks of a deeper correction beyond that seen in April have increased.”
  6. Eurozone unemployment fell to 6.4% in Apriland economic sentiment improved slightly (but remained weak) in May.

What I didn’t like

  1. The April CPI number of 3.6%, when 3.4% was expected and the March figure was 3.5%.
  2. The underlying measures of inflation edged higher, with the trimmed mean inflation rate rising to 3.1% with ongoing sticky services inflation.
  3. Higher bond yields but a disappointing CPI can do that.
  4. CoreLogic home price data showed a lift in average price growth for the five big capital cities to 0.8% in May, as the housing shortage continues to dominate the drag from high mortgage rates. When will Aussies stop buying houses?
  5. Concerns about the US budget deficit at 6% of GDP.
  6. Chinese business conditions PMIs softened in May, which isn’t good for economic growth, which Australia needs.

 

Good outweighs the bad but can it last?

The S&P 500 is up over 14% over the past six months and over 25% for the year! I rest my case on optimism. However, rate cuts without fears of a US recession will be music to the ears of Wall Street’s big market influencers. Our market will lap it up as well. I’ve been telling both you and me to be patient, and that “it won’t happen overnight, but it will happen”, as model and Rod Stewart’s ex-wife Rachel Hunter once said in an advertisement for Pantene hair shampoo!

I’m hoping that the data this week shows that both the US and Australian economies are slowing down enough to keep believing that rate cuts ahead isn’t a pipedream.

I never want you to ask: “What was Switzer smoking?”

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Quote of the Week

For those worried about the RBA raising interest rates because of this week’s CPI number, check this out from CBA/CommSec economist, Stephen Wu: “This is the last inflation print before the RBA’s June policy meeting (17‑18/6). Despite a slight upside surprise, the RBA’s recent commentary that they would ‘look through short‑term variation in inflation’ suggests no near‑term implications for monetary policy. The pick up in prices in some components will be closely watched, particularly in the context of upcoming income tax cuts and other household rebates. But the more policy‑relevant piece of economic data is next week’s Q1 24 National Accounts. On that front, our nowcast indicates we had a soft quarter of economic growth to start 2024, with consumption growth weak and a big drag from the external sector.”

 

Chart of the Week

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