The Point

What’s driving the ASX this week

Australian corporate earnings are ahead of expectations halfway through reporting season.

But there are signs companies are starting to bunker down amid uncertainty on interest rates and wages growth, says Pendal portfolio manager Jim Taylor.

About a third of companies have exceeded market consensus for their June 30 numbers, while some 18 per cent have missed, he says.

Bottom-line earnings and free cash flow have been pleasing. But dividends and buy-backs have disappointed, indicating managers are taking a conservative view on the economic outlook, says Jim.

“Boards are taking quite a conservative view on what the next year looks like.

“They’ve taken the opportunity to temper some expectations and preserve some balance sheet capacity and cash.”

Register for our Beyond The Numbers reporting season webinar on Sep 9.

Monthly inflation data is coming. Here’s what it means

What will the new monthly snapshot of inflation data mean for fixed income investors?

“Inflation bonds will continue to index off the quarterly CPI, which is still the ultimate source of truth,” says Pendal’s head of government bond strategies, Tim Hext.

“Inflation bonds remain very cheap despite a likely tailing off in goods inflation in the months ahead.

“Services inflation will remain stubbornly higher in the medium term, whether measured monthly or quarterly.”

While the monthly CPI indicator is welcome news, it does have some shortcomings, says Tim.

Almost half the basket (eg items that are harder to monitor) will continue to be updated quarterly — and not all in the same month.

That will make predicting monthly numbers difficult at first, says Tim.

“At Pendal we’re now building out our models to help predict monthly movements, given markets will respond.”

Crispin Murray: What’s driving the ASX this week

The market may be range-bound in coming weeks, says Pendal’s head of equities Crispin Murray.

“It’s high summer in the north, there are limited new data releases, we are near a large technical resistance level for the S&P 500 and it appears the sharp move in systematic investors has played out.”

But further out there remains a wide distribution of outcomes, he says:

1. Inflation rolls over, we get a mild recession at worst, earnings declines are limited and the easing cycle starts at the back-end of 2023. The market may consolidate, but ultimately move higher.
2. Inflation proves more persistent, driven by tight labour and higher energy prices as the economy runs too hot and China re-opens. Central banks continue tightening into the downturn and earnings decline more significantly, taking equities lower.

“The key to the call remains the main drivers of inflation: the job market, corporate pricing power and commodity markets.”

Consumers and business head in different directions

Consumer and business sentiment are heading in different directions according to the latest data.

What’s going on?

Early last year consumer confidence boomed as we escaped from lockdowns with money in our pockets, says Pendal’s Tim Hext.

“Sentiment hit an all-time high in April 2021. Weighed down by rising prices and rate hikes we’ve since plunged almost to the March 2020 low.

“For business, however, it’s hardly looked better. An NAB survey sees business conditions at 20, not far off the April 2021 high of 30 (it averages around 5).”

So far rate hikes have been manageable for consumers, but the next 1% this year will start to bite — heavily for some, says Tim.

Meanwhile tight supply of goods and services means businesses are able to pass on higher costs, maintaining margins and seeing conditions as strong.

“Of course, consumers and business can only be out of step for so long — and 2023 will see a reckoning.”