The Point

Crispin Murray: What’s driving the ASX this week

What did we learn from 2022 earnings season? Our head of equities Crispin Murray points to five things:

• Pricing power has been a key point of differentiation among companies. “Disappointing results mostly reflect insufficient moves to offset cost pressure, particularly in the building-related sector and companies with European exposure (eg Dominos Pizza). Companies such as Wisetech and Qantas show the value of pricing power.

• Costs are a headwind to some of the defensive stocks — leading to less defensiveness than expected. We saw this in Endeavour, Coles, Woolworths and Ramsay Health Care.

• Some cyclicals are not experiencing the weakness many feared, eg Nine Entertainment and some advertising-related names.

• Companies with cyclical tail winds are performing well. For example the lithium sector remains strong, as does oil refining.

• The market is liking capital return. New buy-backs from Nine and Qantas were well received.

Tim Hext: Hawkish central banks are telling markets to pay attention

Markets ignored central bank hawkishness in July, says head of government bond strategies Tim Hext.

“Recession talk was all the rage, which meant rate hikes were largely discounted. Financial conditions — measured by bond rates, credit spreads and equities — eased back to May levels.

“Clearly central banks were not impressed. This week they came out swinging, evangelising restrictive rates needed to rein in inflation.

“In Australia we’re likely to get another 50bp hike in September.

“Rates should finish the year around 3%. High levels of household debt (and heavy stress on 2020 and 2021 buyers) means consumers will be hit hard at that level — let alone at higher rates.

“While the RBA will remains hawkish I doubt they will risk sending households broke by raising rates to 4% — even if markets are now playing with the idea.

“I still prefer inflation bonds for now — but 10-year bonds north of 3.5% are interesting again.

What’s driving the ASX this week

Australian corporate earnings are ahead of expectations halfway through reporting season.

But there are signs companies are starting to bunker down amid uncertainty on interest rates and wages growth, says Pendal portfolio manager Jim Taylor.

About a third of companies have exceeded market consensus for their June 30 numbers, while some 18 per cent have missed, he says.

Bottom-line earnings and free cash flow have been pleasing. But dividends and buy-backs have disappointed, indicating managers are taking a conservative view on the economic outlook, says Jim.

“Boards are taking quite a conservative view on what the next year looks like.

“They’ve taken the opportunity to temper some expectations and preserve some balance sheet capacity and cash.”

Register for our Beyond The Numbers reporting season webinar on Sep 9.

Monthly inflation data is coming. Here’s what it means

What will the new monthly snapshot of inflation data mean for fixed income investors?

“Inflation bonds will continue to index off the quarterly CPI, which is still the ultimate source of truth,” says Pendal’s head of government bond strategies, Tim Hext.

“Inflation bonds remain very cheap despite a likely tailing off in goods inflation in the months ahead.

“Services inflation will remain stubbornly higher in the medium term, whether measured monthly or quarterly.”

While the monthly CPI indicator is welcome news, it does have some shortcomings, says Tim.

Almost half the basket (eg items that are harder to monitor) will continue to be updated quarterly — and not all in the same month.

That will make predicting monthly numbers difficult at first, says Tim.

“At Pendal we’re now building out our models to help predict monthly movements, given markets will respond.”