ASX News Live | ASX Down as 2023 Rally Takes a Breather

Another day in the books.

The ASX 200 ended nearly 0.80% lower on Friday and down 1.65% for the week.

At the start of the month, the benchmark index looked on track to gain 10% year to date. But the speed of the gains made investors dizzy, it seems.

And now the ASX 200 is taking a breather.

Will that breather last next week?

Before I sign off, I’ll leave you with a fantastic article from the Financial Times’s Tim Harford on the propensity of ChatGPT to bullshit.

"What #ChatGPT deals in is not truth; it is plausibility," writes @TimHarford.

And that can lead it to spout plausible bullshit. https://t.co/lCAT8osnNU

— Fat Tail Daily (@FatTailDaily) February 10, 2023

 

Australia has the fifth highest household debt as a percentage of net disposable income in the world, according to data from the OECD.

With millions of Australian households set to exit fixed-rate mortgages to the higher variable rates, household living costs could rise sharply as the portion of household spending allocated to mortgage repayments balloons.

Source: OECD

 

The price-to-earnings ratio for the ASX 200 fell below its long-term average last year, with the ratio well below its long-term average for the resources sector.

The Reserve Bank of Australia attributed the dip in the ASX’s P/E ratio to the market raising its aggregate earnings expectations despite ‘little change in share prices over the year.’

Why did earnings expectations rise without sending prices higher? Are the earnings increases expected to be short-lived?

The RBA did not delve into the matter further.

Source: RBA

The benchmark US index — the S&P 500 — started the year strongly.

Yet beneath the surface things contradict the optimism implied by the solid start.

Earlier this week, Factset reported that during January, analysts lowered earnings-per-share (EPS) estimates by a larger margin than usual for the latest quarter.

The quarterly EPS estimate fell by 3.3% from December to January. During the past five years, the usual downgrade for the comparable period was 1.5% an 1.7% during the past 20 years.

Source: Factset

The utilities sector was the only sector to see EPS estimates rise. Energy and industrials had the steepest EPS downgrades, at -6.7% and -6.9% respectively.

Source: Factset

2023 started off with a bang for equities partly because markets thought central banks would ease up on hiking interest rates or even begin cutting rates near the end of the year.

But hawkish comments earlier this week from the RBA’s Philip Lowe and now the release of the RBA’s latest Statement on Monetary Policy may have quashed the more sanguine bets.

The RBA has revised up its near-term trimmed mean inflation forecasts.

That said, the central bank also revised down its forecasts for long-term inflation.

Source: RBA

What are your long-term inflation expectations?

Do you think Australian inflation is set to normalise in the medium-term? Or are you worried high inflation will remain sticky?

So far, measures of longer-term inflation remain close to the Reserve Bank of Australia’s inflation target.

However, the RBA was cautious, throwing in that these expectations ‘mostly remain’ in line with its target. Long-term inflation expectations of union officials, for instance, remain around 3.5% — the highest level since 2009.

The RBA stated:

“Inflation expectations can influence firms’ and households’ wage negotiations and price-setting behaviour. Firms across a broad range of industries report that higher headline inflation outcomes are contributing to higher wage expectations, though most firms citing inflation as a factor generally expect wages growth in the year ahead to be less than current headline inflation rates. This is in part because some of the recent strength in inflation is seen as temporary. Over recent months, firms in a number of industries, particularly market services, have reported that higher labour costs are contributing to price increases; for some of these firms, labour is the most significant component of their costs.”

Source: RBA

 

Inflation may be peaking, but the Reserve Bank of Australia still thinks there’s some pain ahead for Aussie shoppers as goods inflation remains high.

RBA’s latest monetary policy statement stated that the ‘easing of in global goods price pressures is not yet evident in retail prices in Australia.’

The central bank thinks it will take time before prices paid for goods by Australian consumers decline in line with other economies like the US:

“Upstream cost pressures amid strong demand continued to boost prices across a number of goods-related sectors in the December quarter. Some of these cost pressures, such as shipping rates and many commodity prices, eased materially in the second half of 2022, but for most goods it will take time before this affects prices paid by Australian consumers; this is in contrast with a number of other advanced economies where core goods inflation is declining.”

The RBA noticed that price increases were particularly acute for clothing and footwear and motor vehicles.

Source: RBA

In its latest Statement of Monetary Policy, the Reserve Bank of Australia reiterated that inflation may have peaked late last year but remains stubbornly high.

The RBA expects the 7.8% headline inflation over the year to December 2022 to mark the peak of the cycle.

Source: RBA

However, the RBA stated that inflation continues to be broadly based, with around 75% of prices in the CPI basket growing faster than 3% in annualised terms in the December quarter.

That’s not bullish for pundits who think inflation will come down quickly once supply chain shocks are resolved — inflation is too broad for that to have a drastic effect.

Source: RBA

Yesterday, after more than two years of political bickering, an Aussie shipment of coal docked in China.

The unofficial ban, it seems, is over.

This is a milestone moment for Australia and our biggest trading partner, because while trade tensions may not be entirely behind us, this coal is an important first step.

As Chinese commerce minister Wang Wentao commented in an official press release:

‘At present, the economic and trade relations between the two countries are facing an important window period…the meeting is a significant step to push China and Australia economic and trade relations back on track…’

The meeting in question was between Wentao and our own trade minister Dan Farrell. These talks appear to be thawing trade relations at a time when China is desperate to avoid recession.

After all, our commodities have long been a vital part of China’s incredible economic ascent. Without our raw materials, it’s pretty safe to say that they would not have achieved the same kind of rapid growth.

It certainly helped a lot of local businesses too, especially in the mining sector. Which begs the question, could this new era lead to another China boom for investors?

https://www.moneymorning.com.au/20230210/china-may-be-back-on-the-menu-for-aussie-investors.html

REA saw its half-year profit fall 9% to $205 million despite revenue rising 5% to $617 million.

Earnings per share for the half fell 9% and now sit at $1.55 a share. 1H22 EPS was $1.71.

2H22 EPS was $1.38, meaning that on a trailing 12 month basis, REA stock is trading at a P/E multiple of about 41.

REA said the uncertainty about interest rates is driving lower new buy listings. Quarterly new buy listings are down YoY and even tracking below 2018 levels.

Source: REA

That said, monthly buyer enquiries in 1H23 are up 14% on pre-COVID levels, averaging 1.8 million a month.

Source: REA

Could the average monthly buyer enquiries fall further in 2H23?

In its half-year report, REA stated that the volume of listings for the second half ‘is difficult to predict’.

Further, ‘depending on the level of decline against the strong prior period comparables, the target of FY23 Australian positive operating jaws may not be achieved.’

Positive operating jaws refers to when a company’s revenue growth is higher than the growth of its operational expenses. The bigger the positive difference between revenue growth and operational expenses growth, the wider the ‘jaws’ when the two metrics are graphed.

Conversely, if expenses growth outpaces revenue growth, the operating ‘jaws’ are negative.

Source: REA

 

Have you heard about Elon Musk lately?

And, if you use Twitter, have you come across any of his Tweets?

It may sound inconsequential, but the Platformer reports that these are just the type of questions Elon Musk has been asking his engineers.

According to Platformer, Musk fired a top software engineer ‘over his declining view count’. Here’s an excerpt:

On Tuesday, Musk gathered a group of engineers and advisors into a room at Twitter’s headquarters looking for answers. Why are his engagement numbers tanking?

“This is ridiculous,” he said, according to multiple sources with direct knowledge of the meeting. “I have more than 100 million followers, and I’m only getting tens of thousands of impressions.”

One of the company’s two remaining principal engineers offered a possible explanation for Musk’s declining reach: just under a year after the Tesla CEO made his surprise offer to buy Twitter for $44 billion, public interest in his antics is waning.

Employees showed Musk internal data regarding engagement with his account, along with a Google Trends chart. Last April, they told him, Musk was at “peak” popularity in search rankings, indicated by a score of “100.” Today, he’s at a score of nine. Engineers had previously investigated whether Musk’s reach had somehow been artificially restricted, but found no evidence that the algorithm was biased against him.

Musk did not take the news well.

“You’re fired, you’re fired,” Musk told the engineer. (Platformer is withholding the engineer’s name in light of the harassment Musk has directed at former Twitter employees.)

NEW: Elon Musk fired a top engineer over his declining view counts.

Plus the reason the site went down yesterday, fears about an upcoming FTC audit, and more.

From @ZoeSchiffer and me in @platformer.https://t.co/xJKzlsJt69 pic.twitter.com/FTvnirwAbP

— Casey Newton (@CaseyNewton) February 9, 2023

German inflation fell to a five-month ‘low’ of 9.2%.

German inflation fell from 9.6% in December on an annualised basis. Economists polled by Reuters thought inflation would hit 10%.

Source: Financial Times

 

Here’s a market recap fast enough to consume with an espresso.

US stocks fell overnight, and are on track to end the week lower.

It looks like markets are finally taking stock of what central banks are saying — taming inflation will take time. Pausing or even cutting interest rates is not something near on the horizon.

In any case, if central banks were to cut interest rates, it may be for unsavoury reasons anyway — that is, a crippling of economic activity.

As a window to inflation, consumer goods giant Unilever said it will continue to raise prices to cover rising input costs. Unilever CFO said ‘we are probably past peak inflation, but not yet past peak pricing.’

Although isn’t pricing exactly that — inflation? The basic definition of inflation is the rate of change of the overall price level in the economy. Anyway…

Disney, Affirm and News Corp joined the latest big companies in announcing layoffs. Stocks have started strongly in 2023 … but companies are nonetheless dealing with cost pressures and shrinking earnings.

In local property news, REA Group — owner of realestate.com.au — reported a 9% drop in national residential new listings in January. So rising interest rates are starting to bite — sending consumer sentiment and property prices lower.

Speaking of real estate, a recent report found that global commercial real estate prices dipped in the fourth quarter of 2022, the first quarterly decline since 2009.

In crypto news, Bitcoin fell about 5% in the last 24 hours. There are some concerns about more regulatory scrutiny on the sector. Plus risk-on assets like Bitcoin taking a breather as markets grapple with macroeconomic data.

Good morning,

It’s Friday. And another busy day in the markets.

Let’s cover today’s happenings together.