The economic week that was

Well that was another week of your life lost to jerks reacting to any slight update of these El Stupido US debt ceiling negotiations.

Wall Street ended Friday at its highest mark since August last year, erasing losses of a similar magnitude a session or two before.The S&P 500 closed 1.3%, the benchmark index adding 0.3% for the week, a second straight positive. With AI fever reaching pitch, the Nasdaq jumped 2.2%, boosted by Part 2 of the AI-related stock run.

The tech-heavy closed last week 2.5% higher. A  winning streak now five weeks long.

But paying good money on real time market platforms only to watch Wall Street, Europe, Asia and our guys quiver hither and thither every time a politician implied a deal is tantalisingly close has been to this economic philosopher-king both annoying and just another disturbing change of arena for the captive world audience to watch the home of democracy cut off its own face to spite its head.

My note to self on this would be something like: Hey, handsome. Me again. Just kick back.

If this were a teen book series, we’d be in Tome 2 of about 7 – there’s more meaningless revelations, awful dialogue, heaps of red herrings, several great disappointments and lots of setbacks. Being gay is terrific but also not even relevant.

And in the end it’ll be okay, although no one will know what just happened, or what it meant. Because ultimately: Stupido.

Truth be inferred – a quick solution was never an option in the perpetually live broadcast of today’s ‘F#&k You’ US politics.

Both sides know the score.

The US budget deficit is pushing the stupido side of 7% of GDP so the not so stupido Republicans are pushing for deep spending cuts (except OFC for defence). That’d be a win for them in front of Team Trump and hurt the very voters the incumbent Democrats are trying to appease. The Democrats still don’t have a plan beyond tax the rich.

Simply agreeing to terms without a parade of personal insults would not go down well with either sides’ base (and I’m starting to use that word in all its senses) – so a last minute deal with argy bargy along the way was always the only sensible play.

As a result, global share markets and my faith in ever getting off this ride fell again over the last week.

Uncertainty over interest rates along with worries about a shonkier than hoped for Chinese recovery provided maudlin subplots.

Despite a gang-busting Nvidia boost for a select few US tech stocks, world markets retreated but for the ongoing, unlikely sweet patch in Tokyo.

These gloomy global themes and weaker metal prices took the local bourse down about 1.8%, led by shoddy runs for material, retail, property and financial stocks.

A slight plus – bond yields rose globally and at home, with the local money market pricing in no change to rates next month (which seems a wee bit overconfident) but CBA sees a 60% chance of another 0.25% RBA rate hike by August.

Oil prices rose a bit, metals and iron ore fell and the AUD broke below weak-ass technical support to circa $US0.66 against a shamefully strong USD. Hold off on your Euro Vay-kay.

Back to Stupido for a sec

While June 1 seems to remain the US Tresh’ Sec’ J Yellen’s fabulously so-called ‘X date’ (D-Day, if you will) it’s the steadily dwindling state of the actual US Treasury’s bank account which might be able, via some incoming tax receipts, to get the bills paid a little beyond X date… but it’s a moot point in the end – if the US government misses any regular payments then everyone is both welcome and entitled to panic as if the financial world just stopped spinning.

Dr Shane Oliver, who is AMP, says the most likely outcome here – and he’s calling it  a “roughly 85% probability” – is of a debt ceiling increase with some austerity tacked on.

“(US President) Biden cannot afford to risk no deal driving default and big spending cuts and almost certain recession in 2024 and (Rep. House Speaker) McCarthy can’t afford to let Republicans be seen as to blame for any recession and payments not flowing to retirees and veterans.”

Stockhead and UBS gamed this all out a few days ago, but I think the following – direct from the minds of Oliver and Diana Mousina – is worth adding verbatim, and in its entirety, which I now do:

“There are increasing indications that a deal is coming together to extend the debt ceiling to next year (probably after the election) with spending caps resulting in cuts for the next two years and a mechanism for automatic continuing resolutions at spending caps to avoid the threat of government shutdowns, along with permits for various energy projects.

“Assuming a deal is agreed soon, the questions will then be whether it gets enough Congressional support and whether it can be passed in time ahead of 1 June. Objections on the left and right will be high but there will probably be enough moderate Republican and Democrat House and Senate members to pass it.

However, getting it all wrapped up by 1 June may be a bit difficult unless the House waives the 72 hour review rule. If not a short term debt ceiling increase is possible to allow time for the deal to pass through Congress or Treasury may have to delay some spending for a few days (as it did in debt ceiling episodes in the 1980s and 1990).

“Fitch’s decision to put its US AAA rating on negative outlook given the risk of default adds to the pressure, but a further share market fall (which would impact global and Australian shares as we saw in the past week) may be needed to finalise a deal and/or make sure its passed by Congress.

“Raising the debt ceiling will likely drive a short-term bounce in shares but they are vulnerable to spending cuts flowing from the deal adding to the risk of recession and the US Treasury reversing the liquidity boost it’s been providing lately by running down its cash reserves at the Fed.

Although global and Australian shares could have a short term bounce if there is a resolution to the US debt ceiling, they continue to look vulnerable over the next few months.

“We remain of the view that shares will do okay on a 12-month view as central banks ease up as inflation cools but the next few months are likely to be rough.”


I’d just add these riders as well which should be front of mind when the urge to load up on big, small, growth, drunk, funny or baseball ASX caps grabs you:

  1. Share market gains since ’22 lows have been weird, narrow (like AI etc) and very defensive
  2. Much more so than ‘would normally be seen this far into a recovery’ according to Dr O.
  3. The US debt ceiling brinkmanship and its potential post-agreement stank is likely to linger for a while in the form of increased market volatility and possible nausea
  4. US originating banking instability might seem dormant but it could emerge in fits and starts at anytime – like Julius Ceasar’s ‘falling sickness’ everyone knows it could break out at the first sign of stress – say, like more rate rises from the Fed
  5. There’s likely to be more rate rises from the Fed
  6. Heaps of leading economic indicators still indicate of some kind of recession is afoot, in the US and probs here in Australia
  7. China’s 100% guaranteed economic recovery is not 100% guaranteed. Strong retail figures mask deeper probs under the surface.
  8. Falling copper, oil and other industrial commodities scream of weakening global demand and this is playing out for us in the decline of our growth sensitive Australian dollarbuck, which I wish would just toughen TF up sometimes.
  9. Central banks are probably close to the top of the tightening, but pls refer to 4 and 5.
  10. And we all know just how traditionally sucky the bit from May to September can be for shares.


Central banks are just so mixed up

Last week’s tired messages from global central banks was – as per usual – unhelpfully wishy-washy: neither here nor there, a little bit of this and a little bit of that comme ci-comme ça, moitié-moitié, (-般 般 yībānbān)  and (my fav) 马马虎虎 “mamahuhu  (which directly from Mandarin means horse horse tiger tiger or in our boring language: so-so.

The Bank of England looks certain to hike on. London dropped higher than expected inflation from about the UK, probably pin that one on Brexit. And by Brexit, I mean Boris.

At home the RBA Governor Dr P Lowe repeated his squeaky but still hawkish warbles delivered in the form of a message to federal MPs warning of more hikes ahead in what was reportedly a ‘pretty pessimistic’ briefing last week. I wouldn’t read too much into that, if P Lowe gets too thinly veiled in his language to the current stable of Australian politicians they’ll simply have NFI what he’s on about.

The Fed is keeping it as mixed as ever – they could raise more, they might not. Lately they’ve been leaning toward a June pause.

Doc Oliver again:

“Overall, our assessment remains that central banks are at or near the top on rates as inflation pressures are likely to continue to ease – our US Pipeline Inflation Indicator fell further in the last week reflecting declines in PMI price surveys.

This also applies to Australia where soft data, as seen in April retail sales, provides room for the RBA to leave rates on hold at its June meeting.

“This is our base case but continuing hawkish commentary from the RBA along with risks around wages (watch the June minimum wage decision), productivity and rising home prices (which are reversing the negative wealth effect) mean that the risk of further RBA rate hikes is high. The problem is that we are now seeing clear evidence that rate hikes are slowing the economy – with falling real retail sales, falling building approvals, slowing business investment plans and early indications of a slowing jobs market.


The economic week ahead


Belinda Allen, senior economist at Commonwealth Bank, says the RBA will enjoy access to a steady release of economic data this week ahead of the Board Meeting next Tuesday (June 6), with the most focus on the monthly CPI Indicator.

“Our expectation is that the annual rate will print at 6.4%/yr. This looks like an acceleration in the annual rate of inflation given the monthly indicator in March was 6.3%/yr. But our expectation for a slight uptick in the annual rate is largely driven by base effects. Petrol prices rose by 3.0% in April 2023, but fell by 13.8% in April 2022.”

Also out next week is a range of data on the housing market.

Belinda says the lack of new supply and low vacancy rates are pushing home prices back up.

“Based on the daily CoreLogic data we should see a lift of 1.4% in dwelling prices in May.”

The gains are broad based, she says.

“Sydney continues to rise swiftly and Brisbane and Perth gained momentum in May.”

Meantime, key CPI data will drop on Wednesday (May 31).

Investors’ focus will be on a fifth consecutive decline in monthly inflation after peaking at 8.4% in December.

Josh Gilbert at eToro says the latest reading showed that inflation had slowed to 6.3% as the RBA raised rates to their highest level for a decade. However, that decline, along with the quarterly reading of 7%, wasn’t enough for the RBA as they hiked rates again in May to 3.85%.

“Core inflation for both the monthly and quarterly reading came in below expectations, and this will be one of the areas the RBA will be looking at to see clear signs of a slowdown. This inflation data will be the key data point if the Reserve Bank is to keep rates on hold at its June meeting,” Josh told Stockhead.

The RBA will be mildly chuffed that this month’s employment and wages data was weaker than expected, as were retail sales.

“Another decline in inflation will show that the RBA’s massive tightening cycle is having the desired effect, and the Reserve Bank can keep rates on hold to allow the lag of its 12 rate rises to have the full impact. However, investors shouldn’t get ahead of themselves with Governor Philip Lowe continuing to re-emphasise that further rate hikes may be ahead.”

Qantas is having an Investor Day

Moneybags Qantas (ASX:QAN) is hosting its first Investor Day since 2019 this week.

Shareholders are starting to enjoy these, especially after what looks set to be Qantas’ best fiscal year on record.

Investors will be hoping for some reassurance that this stellar performance can continue as Alan Joyce hands the reins over to Vanessa Hudson later this year after 15 years at the helm. The good news for shareholders is the last time Qantas held its Investor Day, the market liked what it heard and shares jumped by 5% in the days after the event.

QAN announced last week it was on track to hand down a full-year profit of $2.5 billion thanks to – hang on – soaring demand, falling fuel prices and rip-off airfare prices. Josh says investors should be all ears for hints at a return to dividending – which stopped once the pandemic hit.

“Given Qantas is on track to record its most profitable year ever, it would be a surprise not to see a return of the dividend when it hands down its full-year results later in the year.

“The day may also be a valuable opportunity for Qantas to give investors a better understanding of how they plan to improve relations between passengers and unions and keep growing competition from the likes of Virgin Australia at bay.”


US Earnings to watch

Memorial Day markets closed

Canopy Growth (CGC)
Hewlett Packard Enterprise (HPE)

Sportsman’s Warehouse (SPWH)
GameStop (GME)
NetApp (NTAP)
Nordstrom (JWN)
Okta (OKTA)
Salesforce (CRM) Group (TCOM)
Victoria’s Secret (VSCO)

Dell Technologies (DELL)
Designer Brands (DBI)
Dollar General (DG)
Lululemon Athletica (LULU)
Macy’s (M)
SentinelOne (S)


US Earnings focus: Salesforce
Salesforce punters will be hoping for another inspired earnings result when it reports FQ2 earnings  (June 1). Following its FQ1 earnings in March, shares jumped by 11.5% after beating expectations across the board and raising its guidance for the full year.

Salesforce (US$210) will drop Q1 after Wednesday’s close in NY.

According to Refinitiv, consensus estimates for the software-as-a-service (SaaS) firm are for earnings of US$1.50 per share, up 53% year-over-year (YoY), on revenue of US$7.6 billion (+2.6% YoY).

Wedbush analyst Daniel Ives  expects Salesforce to post “modest upside” to Street estimates.

“While the macro is not roses and rainbows and CRM is still battling through various headwinds, overall we saw stronger cross-sell activity this quarter and particular strength out of the Tableau front with a number of larger more transformational suite wide deals inked during the quarter,” Ives says.

The focus for CRM this quarter will be on the pivot from sales growth to profitability and how well management is executing, again says J Gilbert of eToro. Margins will also be on watch after the Jan restructuring plan, which included a 10% workforce cull to boost efficiency.

“Corporate spending across big tech peers remained resilient in the quarter, with Microsoft, Alphabet and HubSpot all reporting better-than-expected results, which should spell good news for Salesforce heading into the report. As has been the focal point for most companies this earnings season, plenty of attention will be on AI, which Salesforce has been investing heavily in since 2016.”


The Economic Calendar
Monday May 29 – Friday June 3

Sources: S&P Global, Commsec, Trading Economics, IG Markets 



Australia Private Sector Houses MoM
RBAspeak Gov P Lowe Senate Testimony

Australia April CPI YoY
ABS Construction Work Done 1Q
ABS Private Sector Credit YoY April

Australia Judo Bank Australia PMI Mfg May
ABS Private Capital Expenditure 1Q

Investor Loan Value MoM April
Owner-Occupier Loan Value MoM April
Australia Home Loans Value MoM April

Everyone else

UK, US, German and French bank holiday

Eurozone Consumer/Economic Confidence May Eurozone ECBspeak Holzmann

US Fedspeak Barkin (Monetary Policy, Outlook)
US Fedspeak Collins, Bowman
US Chicago PMI (May)
Japan Retail Sales MoM April
Japan Industrial Production MoM April (prelim)
New Zealand ANZ Business Confidence May
China Composite PMI May
China Manufacturing PMI May
China Non-manufacturing PMI May
EU ECBspeak Villeroy
EU ECB Financial Stability Review
US Fedspeak Collins, Bowman
UK B0Espeak Mann

US ADP Employment Change May
US Initial Jobless Claims
US United States S&P Global US Manufacturing PMI
US Federal Reserve Releases Beige Book
US JOLTS Job Openings April
US Dallas Fed Services Activity May
US Fedspeak Collins
US Fedspeak Harker (Macroeconomic, Monetary policies)
US EIA crude oil inventories (w/e 26 May)
Japan Jibun Bank Japan PMI Mfg May
China Caixin China PMI Mfg
UK Mortgage Approvals Apr
UK S&P Global/CIPS UK Manufacturing PMI May
EU Eurozone Unemployment Rate
EU HCOB Eurozone Manufacturing PMI May

US Nonfarm Payrolls May
US Unemployment Rate May
US Fedspeak Harker (Economic Outlook)
UK Sovereign Rating to be reviewed by Fitch