top of page

The US markets rallied on strong earnings and lower yields, our take on the economy, and more...


The markets had a good week last week. The Nasdaq 100 surged back 7.15%, with the S&P 500 almost keeping up by soaring 6.58% not too far behind. The ASX 200 edged up by 0.5%. This came as a few companies reported strong earnings, bond yields fell and investors found buying opportunities as stocks had become cheaper over the last few weeks. Furthermore, the core personal consumption expenditures price index slowed to 4.9% in April, down from 5.2% in March. This is an inflation indicator that the Fed considers when setting policy. Speaking of, the Fed minutes were released last week. The minutes strongly indicated that half-point rate rises would occur at the next two meetings, in June and July. This was already expected by the market. What was notable however, was that the board members agreed that after several rapid double rate hikes they would assess the effects of these hikes. If these hikes cool inflation pressures quicker than expected, it may be the case that the Fed doesn’t raise rates to what they are currently expected to in the next two years. The market was comforted by the Feds hawkish stance in tackling inflation along with the possibility of easing this stance down the track, depending on the health of the economy. There are some other factors that we have identified that may help them pivot their stance in the medium term. This includes the strength of the US dollar. A strong US dollar is a disinflationary force for the US, as it makes imported products cheaper to buy. This helps bring down the costs for businesses buying inputs from overseas, and consumers buying imported goods and services. Furthermore, the inventory build-up we are starting to see is an indication that demand is already cooling, in which consumers have bought their goods over lockdown and now have more of a desire to spend on services. Inflation has predominantly been driven by the rise of price in goods rather than services, which was more heavily impacted by Covid-19 related lockdowns and restrictions. Target’s (NYSE: TGT) latest earnings was strong evidence for this view point, where they reported a large inventory build-up. This was due to management getting ahead of themselves and being too bullish on their future demand at the time of ordering stock, and they were looking to avoid being short of inventory due to supply chain issues. However, demand tapered quicker than they expected. As inventory build-up is costly to a business, companies with high inventory levels will be looking to reduce this. To reduce inventory, companies will bring down prices. If this starts to happen across the board, this will be another disinflationary force. There are also early signs that some companies are starting to put in hiring freezes due to slowing demand. If this becomes more widespread over time, this may loosen up the labour market which will halt the growth in labour costs to businesses, another disinflationary force. In contrast to some of the issues Target and Walmart (NYSE: WMT) faced, last week Costco (NYSE: COST) reported some fairly positive results. As per our thesis, Costco has been able to use their pricing power to raise prices in certain goods to combat rising input costs. Furthermore, the customer profile of Costco shoppers are different to Walmart and Target’s, with the average Costco shopper having a higher income. This gives them a bigger buffer from inflation to be able to keep up their spending. In addition to this, Costco’s efforts to maintain gas prices several cents below the national average have driven sales and memberships. Costco’s earnings per share came in at US$3.17, above Wall Street’s expectations of US$3.03, and their revenue rose 16% to US$52.6 billion, topping estimates of US$51.71 billion. With a slow week on the earnings front, we will be mainly looking out for economic data. Australia’s GDP is forecasted to grow by 3% from the previous quarter, which is a healthy figure. Over in the US, job openings is expected to be 11 million for the month of April. Nonfarm payrolls is forecasted to increase by 350,000. This is expected to help bring the unemployment rate down by 10 basis points to 3.5%. With the labour market remaining tight, as reflected by these forecasts, wages are being pushed up. The print for average hourly earnings is expected to show a 0.4% month-on-month increase for May, or a 5.5% increase from a year ago. Although these are strong increases in wages, it still represents a real wage cut of 2.8% due to the growth in CPI being higher. Interesting Finance Fact Australia has had the best performing share market in the world from 1900 to 2019. According to the Credit Suisse Global Investment Returns Yearbook, The ASX offered real annual returns just over 6.5%. The US stock market came in second, and South Africa came in third. A few factors which may have helped Australia gain the edge over the US was our richness in natural resources, that it faired better in the GFC and that it was geographically far away from the heart of the conflict in World War II. Austria, Italy and Belgium were the worst-performing markets in this period. We do note that past performance does not indicate future performance.


Have a great week,















Sam Waldron - Research Analyst

16 views0 comments
bottom of page