Switzer on Saturday

This week was one for the market optimists

Founder and Publisher of the Switzer Report
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Selling in May to go away hasn’t been the smart strategy so far, with our S&P/ASX 200 up around 3% since May 1. This week helped with better-than- expected readings on US inflation, while we had Treasurer Jim Chalmers informing us that his economic crystal ball was foretelling of inflation inside the Reserve Bank’s 2-3% band by year’s end!

His gutsy (or misguided) call was made to look possible as unemployment rose from 3.9% to 4.1% on Thursday, which was another ‘good news’ revelation for those praying the Treasurer’s forecasting is on the money.

Happily for investors, the stock market reaction followed the script, with share prices spiking higher on the belief that interest rate cuts are closer than was expected a week ago in both the US and here. In fact, money market traders repriced the future for rates, virtually ruling out a rate rise this year for the local economy.

The only problem with this is the fact that these guys were wrong about the likelihood of rates rising since our last CPI was higher than tipped. The March quarter inflation reading was 3.6%, not 3.5%, but the bigger worry was that the December quarter CPI was 0.6% and the March number was 0.8%.

As you can see, markets are turning on a dime dependent on data drops. This week was a winner for optimists like yours truly. Those in my camp think the economy is slowing faster than the majority of economists are thinking, and that should mean rate cuts will be needed some time this year.

By the way, the pointy-headed number crunchers in Treasury, who have been advising Dr Chalmers for the Budget this week. have called this financial year’s economic growth at 1.75%, which partly explains why they believe the RBA might need to cut sooner than later or risk throwing Australia into recession.

Needless to say, the run of economic readings in coming months will either be good or bad for the Treasurer and his team’s economic credentials. And I guess mine too!

Overnight, Wall Street hovered between slightly negative and positive after all three indexes — the Dow, the S&P 500, and the Nasdaq — had substantially positive weeks.

Despite this, it’s fair to worry about whether this rally of 2024 can last.

Senior investment strategist at U.S. Bank Asset Management, Tom Hainlin, told CNBC that he believes the combination of positive economic growth and decelerating inflation is the perfect incubator to continue providing fuel to rising stock prices.

“That’s a fairly optimistic setup for at least the near future here in 2024,” he said. “We appreciate that valuation is a little high relative to history, but so is earnings growth and so is earnings stability”.

To be fair, however, this guy doesn’t suffer from being a natural born pessimist. The reality is we’re not out of the woods with concerns about inflation being sticky and having trouble getting through “the last mile”, after which inflation is where central banks want it to be.

It’s been a good week for data drops and stock prices, but we need a lot more of them before we see the next big leg up for shares.

To the local story and despite an annoying Friday loss of 66.9 points for the market, it was a good week, driven by better news for US inflation and a rise in the jobless rate here. Both stories that say “inflation will be sticky” scenarios in both countries could be just another example of excessive alarmism.

The S&P/ASX 200 rose 65.4 points (or 0.84%) to finish at 7814.40, which means our market is up 2.45% year-to-date, making me confident that more rises over 2024 are likely, even if some June to September turbulence happens, as it often does.

Friday wasn’t all bad news, and I liked the following:

  1. BHP was up 0.79% to $44.89.
  2. Rio Tinto rose 1.4% to $132.15.
  3. Pilbara Minerals added 2.2% to $4.10.
  4. Mineral Resources was up 0.8% to $78.61.
  5. Star lost 2.17% to 45 cents, after its Queensland casino’s suspension was extended.
  6. Dicker Data dropped 13.2% to $9.25 after a bad trading update.
  7. Lendlease sold its life sciences business and will soon lose its chairman, so the stock gave up 2.08% to $6.11.
  8. Bendigo Bank r0se 8.1% to $10.73 on better profits.

What I liked

  1. With unemployment rising in April from 3.9% to 4.1%, interest rate cuts were back on the table.
  2. The CPI in the US came in lower than expected, rate cuts appear closer, and stocks rose.
  3. The Budget didn’t hurt the stock market this week.
  4. The rising $A, which is good for lowering inflation and travelling overseas!
  5. The NAB business survey showed that that labour costs continued to fall and March quarter wages datafrom the ABS was softer than expected, rising by 0.8% over the quarter.
  6. This from AMP’s Diana Mousina: “In our view, wages growth has peaked and will slow as the labour market loosens (despite the upside wages risks stemming from the Fair Work Commission’s wage decision in June).” The signal from AMP’s leading wages indicator gives a similar reading.
  1. US retail sales data was flat over April, lower than expected and the pace of retail spending has slowed in recent months, which is good for rate cuts.
  2. Over 93% of US S&P 500 companies have reported March quarter earnings, with nearly 80% of companies beating expectations, against a norm of 76%. Earnings growth expectations are at 10% year-on-year, up from 4.1% four weeks ago.
  3. Chinese industrial production remained strong (because of higher electric vehicle and chips spending), up by 6.7% over the year to April and the unemployment rate fell to 5% (from 5.2% last month).

What I didn’t like

  1. Some Chinese economic activity data was weak.
  2. US tariffs on some Chinese imports including electric vehicles, batteries, solar cells, chips, ship-to-shore cranes and certain types of steel, aluminium, critical minerals, and medical supplies.
  3.  The April producer price index was a bit hotter, rising by 0.5% over the month, taking annual growth to 2.2% (and 2.4% for core) but some of the components appeared to be one-off volatile movements (like portfolio management fees).
  4. The New York Fed released its one-year inflation expectations survey that showed that 1-year inflection expectations rose to 3.3% in April (up from 3% in the previous month), the highest reading since November, similar to the signal from the University of Michigan survey. But these are guesses based on expectations and are never very reliable.

Less sticky inflation?

The inflation is sticky story came slightly unstuck this week, but only slightly. I think we’ll need to see at least another three months of data before we can confidently say that both the US and Australia are heading to sub-3% inflation. When that happens, stock markets will get excited, and we’ll see another major leg up.

It’s not a done deal, but this week’s data drops were good news for market optimists. What I saw makes my belief that the final quarter of 2024 could be a ripper! Note, I did say “could”.

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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

This from Treasurer Jim Chalmers which will make his look like a economic expert or a nincompoop: “Treasury is now forecasting inflation could return to target earlier, perhaps even by the end of this year.” You have to hope he right and that this does not prove to be a forecasting error of Dr Phil Lowe proportions!

 

Chart of the Week

The rise in unemployment from 3.9% to 4.1% in April saw money market traders dismiss predictions that interest rates will rise and it put a cut this year back on the table.

Disclaimer

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