Jim Taylor: What’s driving ASX stocks this week?

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Chris Adams

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MARKETS were volatile last week, driven by the blow-off from a US employment report and Yen carry trade reversal in the previous week.

Thursday’s US jobs data provided a circuit-breaker to last week’s employment data doom.

Ultimately, the US equity market finished flat on the week, with the S&P 500 down 0.02%, the NASDAQ down 0.17%, and Australia’s S&P/ASX 300 falling 2.12%.

The US bond market gave up some of its strong month-to-date gains, while commodities were generally softer.

In the absence of much economic data to guide markets, key insights for the week have been derived from US reporting season messages.

Here, commentary highlighted heightened pressure on lower-income consumers, as all the Covid handout savings are gone and extra income is probably, at the margin, harder to generate.

There was also continued softness in big-ticket and discretionary spending, evidence of consumers “trading-down” to cheaper alternatives, and some spillover to travel and lodging demand.

Here’s how the Disney CFO summed it up: “The lower-income consumer is feeling a little bit of stress and shaving a little bit off their time at the parks. The high-income consumer is traveling internationally a bit more.”

As a broad observation on markets, there are two areas where we are evolving to a new (old) normal:

1. Inflation. This is falling everywhere but the easy wins – like in goods – are behind us. The rate of decline is slowing, meaning progress to a “2%-ish” target has become a little more volatile and lumpier, and positive surprises on inflation aren’t a one-way bet anymore.
2. Earnings. The general state of play in most developed economies is that there are distinct hot and cold parts of the economy, and this gets reflected in the disparity of earnings across stock market sectors. The market may have forgotten this over the last two to three years as the excess savings run down effect has been significant in bolstering activity levels across the board. These have been run down and we now need to readjust to the new environment.

Last week’s stock market volatility was on par with both the GFC and Covid.

This week, we see some genuinely meaningful numbers like PPI, CPI and retail sales – so we expect the volatility to roll on.

That said, some of the panic and calls for emergency rate cuts looks way overcooked.

Central banks

The Fed stepped in quickly to make its position clear amid the market’s fuss.

Chicago Fed President Austan Goolsbee said, “the law doesn’t say anything about the stock market; it’s about the employment and it’s about price stability.”

“As you see jobs numbers come in weaker than expected but not looking yet like recession, I do think you want to be forward-looking at where the economy is headed for (in) making the decisions,” he continued.

San Francisco Fed President Mary Daly made the point that inflation is near the target, that the labour market is slowing and that “it’s to a point where we have to balance those goals”.

She also noted that while rates have been left unchanged, the shift in rhetoric to acknowledge the need to balance between two goals is a policy adjustment in itself.

Elsewhere, Bank of Japan’s Deputy Governor Uchida said it would stick with the current policy setting “for the time being” and “won’t raise interest rates when financial markets are unstable”, in what is seen as a bit of backpedalling following the response to the last rate hike.

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US macro and policy

The ISM Services non-manufacturing Purchasing Manager’s Index (PMI) rose from 48.8 in June (its lowest level since May 2020) to 51.4 in July.

The ISM Employment Index also picked up – from 46.1 to 51.1.

This rebound in new orders and a rise in employment helped quell recession fears stoked by the employment report the previous Friday.

Better sentiment on employment was bolstered by initial jobless claims, which came in at 233k versus 240k consensus and the prior week’s upwardly revised 250k.

It is interesting to note that the Bloomberg consensus probability of a US recession in the next twelve months has fallen from 60% this time last year to 30% today.

Goldman Sachs has increased its own recession probability in response to recent data but had been running well below consensus at 15% – now standing at about 25%.

Australia macro and policy

As expected, the RBA held rates steady at 4.35%.

Its statement observed that “momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate, and reports that many businesses are under pressure”.

It also noted that inflation had “fallen substantially” but remains “too high” in underlying terms and with upside risks.

As a result, Governor Bullock struck a decidedly hawkish tone, being very clear that “a near-term reduction in the cash rate does not align with the Board’s current thinking” for the remainder of the year.

She also noted that the Board gave “very serious consideration” to holding rates steady for some time or even to raising.

Australia macro and policy

US reporting season

Beneath all the noise, it has been a positive reporting season.

With 91% of the market having reported, the blended earnings growth rate for Q2 S&P 500 EPS currently stands at 10.8%. This compares to the 8.9% expected at the end of the quarter.

The blended revenue growth rate is 5.2%.

And 78% of the market has beaten consensus EPS expectations, which is level with the 78% one-year average and a bit higher than the five-year average of 77%.

Sales expectations are also being routinely beaten.

Companies are reporting earnings that are 3.5% above expectations, which is below the 6.5% one-year average positive surprise rate and the five-year average of 8.6%.

A significant feature of this reporting season has been the weakness in results and outlook commentary in the leisure sector:

• Airbnb pointed to slowing demand as Q3 guidance for revenue and earnings came in soft, with management calling out “shorter booking lead times globally and some signs of slowing demand from US guests”.
• Lyft’s guidance pointed to a 2-4% deceleration in bookings next quarter.
• Hilton Hotels lowered the top end of its FY guidance amid “softer trends in certain international markets and normalizing leisure growth more broadly”.
• TripAdvisor noted a normalisation of experiences demand, moderating pricing and trading down in travel spend.

It is hard to decompose this trend between normalisation of the post-Covid travel boom and a more cautious consumer.

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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