Switzer on Saturday

US investors are ‘getting’ it good’, compared to Aussies!

Founder and Publisher of the Switzer Report
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The first half of the year of stock trading has ended both here and in the US. Unequivocally, the Yanks have had a cracker first half, with the Nasdaq up over 17.4% and the S&P 500 spiking over 14%, while the less-tech exposed Dow Jones Industrial Average was up only 3.74%.

These contrasting results show the impact of Artificial Intelligence (AI) and the expected pluses for the tech/growth companies, which will gain from looming rate cuts in the US. This latter expectation was helped by the PCE (Personal Consumption Expenditure) index reading overnight.

Against all this very positive news out of the US, we learnt this week that our disappointing inflation numbers still have a lot to do before the RBA entertains the idea of a rate cut. Meanwhile, this lack of inflation-killing here hasn’t helped the stock market, with the S&P/ASX 200 index up only 2.33% for the half year.

Right now, the market’s progress higher hasn’t been helped by rising calls for the RBA to actually raise rates in August. Only the bad news of a rising unemployment number and good news that the June quarter CPI has fallen could justify the central bank board stoically resisting raising rates one more time, which would not only KO a lot of household budgets but also put the skids under the Albanese Government’s re-election hopes.

And it’s only the political impact of a rate cut before the US election in November that will stop the Federal Reserve from cutting in September, but a delay could have some economists and then market players start worrying about a recession or bigger-than-expected slowdown, which Wall Street wouldn’t like.

On the other hand, the actual election’s conclusion should collide with the expectation of a number of rate cuts in the States, and this should make the December quarter one worth waiting for, if you’re a long-term stock player.

To the PCE news and the May statistics said that the US saw the lowest annual rate of inflation in more than three years, with Core PCE (which excludes the more volatile food and energy prices) going up only 0.1% last month and 2.6% on a year-on-year basis.

Headline PCE (which includes volatile prices such as food and energy) was unchanged, up 2.6% for the year. Both readings were in line with expectations.

David Donabedian, chief investment officer of CIBC Private Wealth U.S., got it right with this take on the numbers: “From the market’s perspective, today’s PCE report was near perfect. This was unambiguously a positive report.” (CNBC)

And it was a near Goldilocks day of data, with the University of Michigan consumer sentiment index for June coming in higher than expected, rising to 68.2 from the preliminary 65.6 reading. The index’s one-year inflation outlook also fell to 3% from 3.3% expected in May. This implies that the all-important US consumer isn’t falling off a spending cliff, which is good anti-recession news.

If the Yanks get lower inflation and a lower fear of recession, well, that’s a classic Goldilocks scenario of “just right”. By the way, there could be a bit of Joe Biden disappointment in the stock market indexes overnight on Wall Street. Democrats were hoping for a Joltin’ Joe. The Republicans expected he’d be “Jacked Up Joe” on drugs for the debate. However, Biden started like he’d been smoking ‘something’ and the calls for a replacement candidate are growing.

To the local story and the S&P/ASX 200 index was down 28.5 points (or 0.37%) for the week, reflecting the disappointment around the May monthly CPI, which didn’t help the RBA keep rates on hold, let alone resist calls for a rise in August.

And the AFR headline that “Recession a 50:50 chance if RBA raises rates…” is no help for stock prices as well, though we did manage a rise for the last day of the financial year for share trading, with the index up 0.1% but we did manage a 7.8% gain for the 12 months.

Stocks-wise, Friday was the last day for profit-takers and loss-sellers and that’s why the likes of Pilbara Minerals (PLS) was off 5.83% and Mineral Resources gave up 3.6%. What’s the bet they’ll have buyers next week?

Big news was Treasurer Chalmers saying ‘yes’ to ANZ’s bid to buy Suncorp, so the former’s share price fell by 0.2% to $28.24, while Suncorp lifted 3.6% to $17.41.

According to the AFR: “Shares in fellow insurer IAG surged 7.2 per cent to $7.14 after detailing a major reinsurance deal and confirming operating earnings guidance for the 2024 financial year. Elsewhere, Mirvac Group sold a $1.3b stake in a new office tower in Sydney to Japanese developer Mitsui. Shares in Mirvac firmed 3.3 per cent to $1.87”.

And profit-takers hit Guzman y Gomez with a 7.5% slump on Friday to $27.42.

What I liked

  1. Despite the bad CPI news this week, this from Shane Oliver keeps optimists more positive: “However, another RBA hike is not fait accompli though and our base case remains that rates have peaked. Firstly, June quarter inflation may surprise on the downside as the monthly CPI is an unreliable guide to the quarterly, which remains the gold standard.”
  2. May data confirms that the budget is on track for another big surplus in 2023-24 possibly around $20 billion, thanks to the ongoing tax revenue windfall.
  3. US economic data over the last week was soft with a fall in consumer confidence, softer momentum in home prices, falls in new and pending home sales, falls in underlying capital goods orders and shipments, a small fall in initial jobless claims but a further rise in continuing claims, indicating that once a job is lost it’s getting harder to find a new one. Note: bad news is good news for rate-cutting but next year a bag of data like the above will be “What I didn’t like” stuff because it could imply a recession is possible.
  4. Household wealth locally surged 10% over the year to the March quarter on the back of the rebound in home prices and share markets. While I like this news being in the wealth-building game, it doesn’t help beat down inflation!
  5. The RBA should like this: “For the three months to May vacancies fell another 2.7% and are now down 26% from their high two years ago.”
  6. Private credit growth slowed slightly in May but this would be a low order statistic for the RBA to care about.

What I didn’t like

  1. The monthly CPI indicator rose 4% in the 12 months to May.
  2. The rate reaction to the CPI where calls for a rate rise are growing.
  3. Australia’s Monthly CPI indicator has now gone up for three months in a row, driven by an upswing in services inflation at a time that goods inflation has stopped falling.

A President Trump and stocks?

During the week on Switzer Daily, I looked at a President Donald Trump and the likely market reaction, which could be bad for some sectors and businesses but the overall market would probably take his presence in the White House in its stride (see the link for this story in Switzer Daily list below).

For those interested, following the disastrous debate for President Joe Biden, the PredictIt betting market now has a 57% probability of Trump winning versus Biden on 35%!

Switzer This Week

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Switzer Report

Switzer Daily

 

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

CBA Economist Stephen Wu: “The RBA will take stock of today’s figures with some concern, particularly as their rhetoric has noted the need to ‘remain vigilant on upside risks to inflation’. However, there is still the full June quarter CPI print to come. This remains the benchmark measure of inflation in the country. Between now and the August Board meeting, the RBA will also receive another read of the labour force survey and two more reads on retail spending.”

Chart of the Week

This broke a lot of rate cut hopefuls hearts with the CPI on the rise!


Disclaimer

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