Weak economic data, banking turmoil, and strong earnings results
After a relatively quiet few weeks the financial newswires have sprung back into life with positive US earnings surprises, another distressed US bank and an Australian inflation print that appears to have something for everyone. The best earnings results have come from some large tech stocks like Microsoft, Google, and Facebook, but it was also the tech-heavy Nasdaq that moved the most on the news that First Republic had suffered huge deposit outflows. The Nasdaq has recovered completely after a 3% round trip this week, but it underscores the zeitgeist of a nervous market that doesn’t really know what to make of some very mixed data and an uncertain outlook. The last few days have seen some relatively weak economic data, culminating in a lower-than-expected US GDP figure of 1.1% (annualised) for the first quarter. Meanwhile, companies outside tech have also been reporting better than expected results, with consumer giants Pepsi and McDonald’s demonstrating a surprising ability to pass rising costs on to consumers, and industrials like Caterpillar have also been surprised by strong demand.
To cap off a frustrating week for central bankers, the Fed’s preferred measure of inflation (the Personal Consumption Expenditures Index) also came out overnight, and seems to imply that on some measures, US inflation is actually accelerating, particularly in the services sector. A rolling credit crisis and a decelerating industrial economy, along with a cashed-up consumer stoking inflation, is probably the worst near-term scenario for central bankers. However, if companies have pricing power, people are spending, and central banks become wary of raising rates too much, then it might be a great environment for investors. That all remains to be seen, but for now all we can really say about markets, especially the all-important US market, is that they have become noisy. However, the reporting season is going better than expected, and it will probably be another three months before corporate data has anything meaningful to say about an imminent recession.
Outside the US there wasn’t much more clarity. Chinese stocks have been falling in recent days, following surprisingly robust economic data and very strong retail sales. The thinking here is that this is due to profit taking and/or the thought that a stronger economy will mean less stimulus. Or, once again, the market just doesn’t know what to make of volatile and noisy post-COVID data. Europe has been the next most volatile market, while most other countries and regions have been almost flat since Easter.
In Australia the latest inflation numbers for the first quarter of this year got a positive reception from the market, especially the bond markets, which saw yields tick down a bit, and expectations of any further rate rises in the cycle dampened. However, the data was nuanced. Many are seeing the drop from 6.9% to 6.6% core annual inflation as a sign that inflation has definitively peaked in Australia. It probably has, but there are just as many pointing out that a continued rise in domestic services inflation is being masked by falling goods and energy prices, and that the RBA’s hand may be forced once more. Overall, the equity market has been fairly settled and keen to look on the bright side, with the local banks seemingly untouched by tightening overseas credit conditions and benefitting from signs of resilience in the local housing market. This has been offset by modest declines from the big miners, while most other sectors were up.