Week in Review
It was a better week for global equities as fallout from the Syrian airstrikes was limited allowing markets to re-focus on a positive US earnings reporting season. According to FactSet Research, around 80% of the 17% of US S&P 500 companies that have reported so far have beaten expectations, compared to a 5-year average of 70%. At 5.9%, the average percentage earnings beat is also above the 5-year average (4.3%) – but so far at least, according to FactSet estimates, the market has been less rewarding than usual to companies that beat estimates.
This likely highlights the fact that a bumper earnings season (reflecting the Trump tax cuts) appears to have already been anticipated to a degree. What’s more, there’s simmering concern over the tech outlook, given Facebook’s problems, Trump’s war on Amazon and reports on Friday of slowing demand for smart phones.
Also not helping is the further lift in bond yields, reflecting ongoing solid global growth and recent added inflation concerns due to rising oil and metal prices. Indeed, oil prices pushed higher last week helped by a drop in US weekly inventories, while base metals lifted following imposition of new sanctions on Russian producers. US 10-year bond yields ended the week at 2.95%, or 1 basis point above their recent high in late February. In terms of economic data, US retail sales bounced back strongly in March, providing some reassurance that the consumer outlook remains positive after a string of unusually weak monthly reports.
Locally, key highlights were a further drag on financial stocks given ongoing revelations from the Banking Royal Commission, while resource stocks continued to find favour – for the second week in a row – reflecting firmer iron ore prices. Indeed, after trending down since late January, resource stocks bounced off trend line support in recent weeks, helped by a modest rebound in iron ore prices – sentiment toward which was partly helped last week by a small cut in bank reserve requirements by the Bank of China. It remains to be seen, however, whether the uptrend in both can continue in coming weeks!
In other news, the March labour market report added to evidence that employment growth may be finally slowing after a period of very strong performance – a period which, incidentally, did little to push the unemployment rate substantially lower or wages much higher. The concern now is whether more moderate employment growth means the unemployment rate will stop falling or even inch higher – which obviously would not be great for wages growth or the prospect of an RBA rate hike.
Barring any sudden new Trump disruptions, a key highlight globally is likely to be the ongoing US earnings reporting season. In what will be the busiest week of the season, attention will focus on key reports from FAANG stocks such as Facebook, Amazon and Alphabet (Google). US Q1 GDP is expected to slow to 2%, which is partly payback from the super charged 2.9% pace in Q4. Also worth watching will be the US employment cost index, given concerns over tight labour markets potentially causing a breakout in wages. Reflecting ongoing low inflation, both the Bank of Japan and European Central Bank are likely to remain firmly on hold when they meet this week.
Locally, a key highlight will be the Q1 consumer price index (CPI) report on Tuesday, which is expected to show underlying inflation remains contained at just under (1.9%) the RBA’s 2 to 3% target band. Easing house prices, weak wages growth and ongoing strong retail price competition seem likely to keep inflation fairly benign for some time.
Have a Great Week!