Cutcher's Investment Lens | 24-28 June 2024

Weekly recap

What happened in markets

The Australian sharemarket closed lower last week, after May inflation data was higher than expected (up from 3.6% to 4.0% year-on-year). This caused some investors to revisit their beliefs as to whether another interest rate hike from the RBA was a real possibility. While the ASX 200 Index fell 0.4% in the week, it rose 0.9% in June and finished the financial year ahead 7.9%. From a company perspective, iron ore miners lost ground thanks to lower iron ore prices, while the opposite was true for gold miners. Notably, Suncorp advanced 3.8% on news that it received approval for the $5 billion sale of its banking arm to ANZ. Interestingly, ANZ actually gave up 2.4% over the week.

US sharemarkets were relatively unchanged last week, as continued disinflationary trends seen in economic data were offset by the heightened volatility caused by the first formal debate (between Biden and Trump) ahead of the US Presidential Election. Noteworthy company specific news in the US came from Apple, which announced its new iPhone 16. The new iPhone, which will be released in September this year, will incorporate AI technology and is expected to trigger an upgrade cycle amongst its customers.

European sharemarkets were also weakened by political uncertainty last week, as the French snap election fast approached. Germany’s jobless rate rose to 6.0%, its highest level in over three years, while consumer data also showed increased caution. These factors more than offset signs of further price decreases seen in countries like France and Spain. Important company news included aircraft manufacturer Airbus’ cut in deliveries and profit guidance, which led its share price down 13.7%.

Stock & sector movements

 

What caught our eye

The prospect of a soft landing for the US economy seems achievable following recent economic data, which revealed a slowdown in growth during the first half of the year. This deceleration is primarily due to the US Federal Reserve's (Fed) higher-for-longer interest rate policy and the persistent sting of inflation.

Following the release of the softer economic data, the Atlanta Fed's GDPNow forecast revised June 2024 quarter growth down to 2.20% from the previously anticipated 3.00%. This adjustment underscores how the Fed's strategy of maintaining interest rates at a two-decade high is curbing demand by making borrowing more expensive for consumer goods, home purchases, and business equipment. 

Fed officials hope that this moderation in economic activity will further suppress inflation, providing room to lower interest rates. At the time of writing, interest rate markets anticipate the first 0.25% rate cut on 18 September, ahead of the US Presidential Election on 5 November.

The housing market is certainly feeling the impact of approximately 7% mortgage rates. A report from Thursday highlighted a significant drop in the National Association of Realtors' index of contract signings for previously owned homes, marking the lowest level since records began in 2001.

Moreover, after-tax personal income, adjusted for inflation, increased by only 1.5% in the first quarter compared to the previous year, the smallest annual rise since 2022. Labor demand, a critical driver of income growth that fuels spending, is also softening. Continuing jobless claims, indicative of the number of people receiving unemployment benefits, have risen to their highest level since 2021, suggesting that unemployed Americans are taking longer to find new jobs.

Despite these challenges, the Atlanta Fed's growth forecast of 2.20% remains relatively strong. This confidence is bolstered by rising corporate profits in the US, with earnings per share for the S&P 500 projected to grow strongly over the next two years, with annual profit growth of 13% expected.

The week ahead

This coming week in Australia we will be looking out for Retail Sales data and the RBA’s June monetary policy meeting minutes. Consumer spending is expected to remain soft, while market participants are eager to understand the RBA’s thinking and whether another interest rate increase is probable. 

Overseas, China Purchasing Managers’ Indexes will give insight into whether weak factory activity has continued to weigh on the economy. Meanwhile, we will get a look at the US Federal Reserve’s June monetary policy meeting minutes, along with US factory orders and US job openings. 

 

 

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