The past week in markets was significantly calmer and the market’s attention reverted to the culmination of the US earnings season. Even though the market reacted more to individual misses, results, overall, have been reasonably strong and guidance hasn’t been bad enough to substantiate recession fears that emanated from the recent rise in unemployment. Now that the dust has settled many commentators are putting that weakness down to more workers rather than less jobs which has settled recession fears to a large extent but may still give the Fed an excuse to ease - Goldilocks  is back in the house, for now at least, and most markets were up a few percent. In recent days markets have been particularly calm ahead of the August US CPI print which will come out overnight - watch that space…..  

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Central Bank Movements 

A key focus was on inflation data and its implications for the Fed's rate path. US PPI data on Tuesday came in slightly below expectations, bolstering the case for the Fed to begin cutting rates in September. This caused a rally in Treasuries and further gains in equities, with tech stocks like Nvidia surging. However, markets remained on edge ahead of the crucial CPI release on Wednesday.

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In Australia, the RBA's messaging pushed back against market pricing for rate cuts this year. Deputy Governor Bullock emphasised that the conditions for a cut are unlikely to be in place for a while based on their current assessment, with the RBA focused on the persistence of inflation pressures. Australian wage growth remained elevated at 4.0% YoY in Q2, in line with RBA forecasts but confirming that a pullback in wages is likely to be gradual. The NAB Business Survey showed a slight improvement in conditions but continued easing of inflationary pressures.

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In New Zealand, the RBNZ's policy decision was a major focus. Economists were evenly split on whether the RBNZ would cut rates, causing significant volatility in short-term Kiwi rates ahead of the meeting. Markets were pricing an 80% chance of an RBNZ cut as inflation expectations declined.

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The US Earnings Season

The S&P 500 reported a robust year-over-year earnings growth rate of 10.8%, the highest since Q4 2021, driven by strong performances in sectors such as Utilities, Information Technology, and Financials. Revenue growth, however, was more modest at 5.2%, marking the 15th consecutive quarter of year-over-year revenue increases.

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Individual company performances have varied, with some notable examples highlighting the broader trends. Eli Lilly, for instance, saw its shares rally by 9.5% after raising its annual revenue guidance by $3 billion, reflecting strong demand for its weight-loss drugs. Conversely, Warner Bros. Discovery faced a 9% drop in shares following a substantial $10 billion loss due to write-downs. These mixed results underscore the market's sensitivity to earnings surprises, with positive surprises being less rewarded and negative surprises more harshly punished than average.

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Now some of the macro, geopolitical risk has left the front pages and the implications for the wider economy of the last earnings season are significant. The fairly strong earnings growth suggests resilience in corporate America, despite the economic challenges of elevated interest rates and political uncertainty (although the fact that big business doesn’t have a clear favourite probably helps). However, the mixed revenue growth and the market's volatile reactions to earnings reports indicate underlying uncertainties, particularly regarding consumer demand and inflationary pressures and suggests that we might continue to see a slightly nervous and range bound environment for the rest of the year.

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Australian Earnings Season 

Now in Australia, the attention turns to the local earnings season. In its early stages, it has been marked by a general decline in profits across several sectors, reflecting ongoing economic challenges. However the market has been fairly resilient, reflecting quite dour expectations: 

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Australia's top 200 listed companies are expected to report a modest decline in profits for the 2023-24 financial year (-2-3%), following a 2.9% drop in the previous year. However, this decline marks the end of a period of "abnormally high" profits experienced during the COVID-19 pandemic.

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The energy sector has seen a sharp fall in profits, contributing significantly to the overall decline. Miners, banks, and consumer staples are also expected to report lower earnings, while utilities, healthcare, and industrials are anticipated to post gains.

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Today’s ‘strong as expected’ result from the world’s most expensive large bank -CBA- has strengthened sentiment but it wasn’t quite enough to convince analysts that it is a good buy. Many analyst’s reaffirmed or issued sell recommendations as the result, underscoring its dominant position in mortgages rather than suggesting how it might build on that.

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Mining companies like BHP and Rio Tinto continue to be under pressure, facing challenges due to China's sluggish economic performance, which has impacted demand for Australian commodities. Rio Tinto and BHP are down almost 5 percent this month despite Rio reporting a 14% increase in net profit, supported by strong demand in its copper and aluminium segments. 

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Also underscoring the nervousness of the market CSL reported strong results that were above expectations and accompanied by a bullish outlook. However, the company mentioned weaker performance in one recently acquired business unit which left the stock down 5% before recovering somewhat.

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The most attention is being paid to retail stocks as an indication of how pessimistic consumer sentiment is, with discretionary spending under pressure. This week retailers like JB Hi-Fi and Myer have reported mixed results, with JB Hi-Fi outperforming (weak) expectations and being handsomely rewarded despite a 16% drop in earnings. 

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After two years of declining earnings, an overall rebound to 4.8% growth is expected in the upcoming financial year so guidance will be critical. As the earnings season ramps up this week analysts will be particularly closely watching guidance on consumer spending and input cost pressures.

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All this will be interesting for Australians but the key question for the market will be whether the Fed and other central banks can engineer a soft landing and tame inflation without causing a significant economic downturn. Tonight’s CPI print will be a crucial part of that jigsaw.

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