Analysts and pundits alike all had their focus on the RBA meeting last week, trying to decipher and decode any shift in wordings by RBA Governor Phillip Lowe. This is in light of the shifts the RBA has made recently, including caving to the bond market by admitting a rate rise will occur before 2024.
As expected, the RBA kept the overnight cash rate at 0.1%. In their statement, we noticed a key omission when compared to last month. Last month Dr Lowe stated that underlying inflation will “be no higher than 2.5 per cent at the end of 2023” in reference to when he expected rates to rise which is tied to inflation. However, it was not lost on us that this time around the reference to a specific time period was dropped.
This gives the RBA optionality to shift the monetary policy levers earlier if things develop differently to what is anticipated. This conveys that the Australian economy is bouncing back quicker than they expected. The Australian economy is expected to return to its pre-delta track in the first half of 2022, rather than the second half which was the RBA’s original guidance.
As we expected, Dr Lowe held the line in reinforcing that wage growth will be the key factor in confirming stickier levels of inflation which will cause the RBA to raise rates.
I feel the need to emphasise that there should not be any concern with an increase in interest rates in the next few years. It is not the norm for rates to be at these record lows, so the economy and markets should not fear rates rising to levels that are still objectively low. In fact, rates going up slightly and at a measured pace indicates that the economy is performing strongly enough that a more highly expansionary monetary policy is not required.
Over in the US, The US Job Opening and Labor Turnover Survey (JOLTS) was released last week, with a print of 11.03 million job openings in October. This beat forecasts of 10.37 million. As a key forward looking measure, it indicates that the US economy is continuing to recover strongly as employers look to hire more. This is matching the trend of a falling unemployment rate which is heading towards full employment, as well as initial jobless claims coming in at 184,000 last month, well below expectations of 215,000.
US Core CPI for November came in at 0.5% month-on-month growth. This figure was in line with economists’ expectations.
We were pleased to see Costco’s solid start to their 2022 fiscal year, beating estimates across the board in Q1 results:
· EPS: $2.98 vs $2.60 expected
· Revenue: $50.4 billion vs $49.3 billion expected
· Comparable Sales Growth: 15% vs 12% expected
We were particularly delighted to see comparable stores growth beat expectations. Comparable stores growth is the growth in sales generated from warehouses and websites that have been in operation in over one year, or those which were all in the previous Q1 2021 report. This shows that existing sales channels have not yet saturated the local market, and that sales are not being cannibalised by the company’s newly opened stores.
Looking ahead to this week, the Fed will be deciding interest rates this Thursday, which will be kept at 0.25%. With this a given, we are more interested in reviewing the statements that the Federal Open Market Committee (FOMC) gives. This will include their updated economic outlook and potential clues on future monetary policy. In particular, we should hear a bit more about their views on accelerating tapering to wrap up before June 2022, which was mentioned recently.
The print for PPI for November in the US will also be released, forecasted to have 0.6% month-on-month growth.
Another quiet week on the earnings front, all our attention will be focused on Adobe which is a holding in Kauri Asset Management’s Global Growth Portfolio. We particularly like Adobe for its wide moat it holds in its Creative Cloud products, which makes up the majority of their revenue. Adobe Creative Cloud is so pervasive within the creative world and the educational system that replacing it would be an extremely difficult task. These products include Photoshop, Premier, Illustrator, InDesign, After Effects, Fireworks, XD, and Dreamweaver. Its earning per share is expected to come in at $3.19, with revenue of $4.09 billion.
Have a great week,
Sam Waldron - Research Analyst