The Monday Report – 08 August 2022

This story features REA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: REA

By Greg Peel

Setting the Scene

A flattish session on Wall Street on Thursday night ahead of Friday night’s jobs numbers did not stop the ASX200 rallying straight to the 7000 level from the open, where it came to a screaming halt. While this coincided with the release of the RBA’s Statement on Monetary Policy, that told us nothing we didn’t already know.

The 7000 level triggered selling that lasted half an hour but once cleared, it was back into buying mode. On Thursday the index passed through 7000 only to fall right back again. On Friday it held its ground and closed above.

This once support, now resistance level seems a reasonable platform from which to jump, either way, on earnings reports. They begin to ramp up this week, and there are are some biggies amongst them, but it is the following two weeks which bring the flood.

In the middle of this week we will nevertheless see the US July CPI numbers, which have the power to very much cloud the local earnings issue.

Friday’s trade was a bit of a mixed bag sector-wise. The consumer sectors fought back from weakness earlier in the week, with discretionary up 1.1%, staples 1.3% and healthcare 1.0%.

The big mover was nonetheless materials, up 1.9%, as investors moved into miners both big and small. This sector has been very volatile of late. At least we’ve not seen metal prices fall out of bed due to China’s games off Taiwan.

Energy was the biggest loser (-1.4%) on lower oil prices, while technology (-1.3%) followed the Nasdaq.

It looks like investors are getting a bit nervous about the housing market, after July showed the fastest drop in house price in 40 years. REA Group ((REA)) fell -3.7% on Friday and Domain Group ((DHG)) -1.6%, while Domain stakeholder Nine Entertainment ((NEC)) dropped -3.8%.

The Aussie ten-year bond yield fell -5 points to 3.08% but that might change today, following a big jump in US yields on Friday night.

A surprise surge in US jobs in July had Wall Street rather confused on Friday night. The S&P500 closed mildly lower and our futures were down -7 points on Saturday morning, suggesting 7000 can be held for now.

Funny Recession

We recall that a solid July on Wall Street finished on a high following Jerome Powell’s hints that the pace of Fed tightening will now begin to ease after the 75 point July hike. Wall Street began to assume 50, 25, 25 at the next four meetings.

The US bond market went further, pricing in an expectation the Fed will need to be cutting rates next year to combat a recession, sending yields way off their earlier highs.

Well, the mood changed substantially on Friday morning (US) when the July jobs numbers came in at 528,000 added, when economists had forecast 258,000. The unemployment rate fell to below pre-pandemic levels at 3.5%, from 3.6% in June, to the lowest level since the 1960s.

Average hourly pay rose 0.5%, but remained flat year on year at 5.2%. That may be another sign of inflation ready to ease, albeit 5.2% is still the fastest pace of wage growth since the 1980s.

Seriously, how can there be a recession with the labour market so strong, and wage growth ensuring plenty of consumer spending power?

This is the question which has Wall Street in a current state of confusion.

The Dow initially fell -240 points on the jobs numbers, and the S&P500 over -1%, implying good news is bad, but then staged a recovery to the close, implying what can be bad about such strong jobs growth that possibly kills off recession fears?

The US ten-year bond yield jumped back 16 points to 2.84%, and the two-year yield more so, suggesting Wall Street now expects another 75 pointer from the Fed. But the next meeting is not until September, and before then we’ll see this week’s CPI numbers, and then another round of jobs and CPI data for August before the FOMC again meets.

The two-ten yield gap has now blown out further to 40 points.

One point of concern in the jobs number was a fall in the participation rate, which helped the unemployment rate lower. This suggests workers are giving up on the jobs market, which, when combined with a now rising rate of weekly new jobless claims, is seen as an ominous harbinger.

So there remain plenty of punters who insist next year will bring the true recession, as despite a strong labour market now, aggressive Fed tightening to curb inflation, along with balance sheet reduction, will ensure a “soft landing” is merely a pipedream. History shows it’s not unusual to see jobs growth into a recession.

The likes of JPMorgan CEO Jamie Dimon are on the side of there’s simply no sign of recession at present. Earlier in the year, Dimon infamously warned of a “hurricane” coming down the road. On Friday night he was lauding both jobs growth and the strength of the US consumer – the latter backed up by JPMorgan’s own credit card data.

In short, views on Wall Street are polarised.

With the US earnings season now entering its long tail, all Wall Street can now do is watch the data between here and September. Unless Jerome Powell says something critical at the Jackson Hole gathering this month, although he may not even attend.

On the matter of earnings, a raft of heavily beaten down stocks, and heavily shorted stocks, reported on Friday night.

AMC Entertainment (cinemas) jumped 19%, Cloudfare (cybersecurity) 27%, Beyond Meat 22%, Lyft (another Uber) 17%, and Carvana (cars from a vending machine) 40%.

Commodities

The LME seemed to like the US jobs report, mostly. The zinc price shot up after Glencore warned that Europe’s energy crisis poses a substantial threat to supply. Glencore has already suspended production at one of its zinc smelters in Europe, leading to a sharp drop in its metal output this year.

On Thursday it disclosed its other smelters in the region are barely turning a profit. Not sure why the same impact is not being felt (or assumed) in aluminium smelting.

The strong US jobs number had US bond yields surging and the US dollar along with it, which is not good for gold.

The US dollar index jumped 0.8%, sending the Aussie down -0.8% to US$0.6916.

The SPI Overnight closed down -7 points on Saturday morning.

The Week Ahead

The week’s earnings calendar kicks off with Aurizon Holdings ((AZJ)) and Suncorp ((SUN)) among today’s reports. Across the week we’ll see the likes of Commonwealth Bank ((CBA)), Telstra ((TLS)), Woodside Energy ((WDS)), QBE Insurance ((QBE)), Insurance Australia Group ((IAG)) and ResMed ((RMD)).

National Bank ((NAB)) provides a quarterly update tomorrow.

Tomorrow also brings the monthly NAB business confidence survey, and on Wednesday, the Westpac consumer confidence survey.

The US will see July CPI numbers on Wednesday and PPI on Thursday, with consumer sentiment on Friday.

China will report inflation numbers on Wednesday.

The UK will report June quarter GDP on Friday.

The Australian share market over the past thirty days…

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