Optimism in the air as overseas inflation eases

Greg Smith is the head of retail at Devon Funds www.devonfunds.co.nz and a regular opinion contributor.

OPINION: Markets have been having a good time of it of late. The NZX50 is back around the 12,000 mark, with the index rising around 0.8% last week. Our benchmark is up over 4% so far in 2023.

As is often the case, tailwinds to our stock market have had a big helping hand from global sentiment. The S&P500 in the US has gained nearly 9% so far this year. Confidence has been fairly broad based, although the technology sector has driven the momentum – the tech laden Nasdaq has rallied around 17% year to date.

Optimism has been driven by signs that the global economy is holding together better than expected. Inflation is coming down, and this has added credence to the view that central banks are nearing the end (some have already paused) of their rate tightening plans.

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The US earnings season has thus far been encouraging, with results from the large banks helping investors (and depositors) to move on from last month’s banking crisis. That said, some of the banks at the centre of concern are not out of the woods yet. US officials have invited some of the bigger banks to make a bid for beleaguered Californian lender First Republic. The government likely wants to act quickly again to ensure that regional banking contagion concerns do not rear their head again.

Results from the big technology companies last week were generally on the positive side of the ledger. Microsoft shares hit a one-year-high after quarterly revenues and earnings comfortably beat expectations, with its cloud business performing strongly. Facebook owner Meta Platforms also surged after the company reported an unexpected increase in quarterly revenue after three straight periods of declines. The advertising market seems to have plenty of life in it, which is consistent with what was seen in results from Google owner Alphabet earlier in the week.

Amazon sent a similar message about the advertising market, although the tech titan’s cloud business is slowing down from very robust levels of growth. The reality has set in for many tech names post the pandemic boost. Another tech name cutting costs is Intel, which reported the biggest quarterly loss in its history. Investors were however enthused by reports that the slow-down in the PC market is starting to plateau.

A big test for the tech sector and the earnings season will come this week with Apple reporting. Given concerns over a wider economic slowdown, and consumer belt-tightening, there will be a lot of focus on how iPhone sales are holding up. There will also be keen interest on the release date for the company’s virtual reality headsets, seen as another growth driver.

The global economy is clearly slowing down, but there are also bright spots. US first quarter GDP numbers came in below forecasts, but strength in consumer growth, a big economic growth engine, surprised on the upside. The Non-Farm Payrolls will provide another read on US job creation which has been strong this year.

Before then, we have the Federal Reserve meeting – another 25 basis points rise in interest rates to just above 5% looks likely. Inflation is coming down, but possibly not at a quick enough rate. A key inflation gauge followed by the Fed, the Core Personal Consumption Expenditures Index, fell only slightly in March to 4.6%, from 4.7% the previous month.

It is a similar story in Europe with the European Central Bank (ECB) also having its meeting this week. Several officials have suggested that inflation is going in the right direction, but not quickly enough.

Before then, we have the Reserve Bank of Australia (RBA) meeting on Tuesday. The Australian central bank pushed the pause button on interest rate hikes at the previous meeting. Last week a release showed the core consumer price index (the RBA’s preferred inflation measure) eased to 6.6% from 6.9%. On the quarter, core CPI increased 1.2%, a sharp slow-down from the 1.7% gain in the preceding three months, and the lowest reading since the December 2021 quarter.

Back home we have the Reserve Bank’s six-monthly financial stability report this week, which will give a view on how the central bank sees the outlook for the economy. Officials acknowledged last week that the property market has cooled sufficiently to warrant easing loan to value ratio restrictions.

Recent business and consumer confidence surveys also suggest there is some caution around the outlook, although sentiment appears to have generally improved from the lows seen late last year. A truer test of business intentions may come with the first quarter employment data due out this week – the unemployment rate is expected to tick up slightly to 3.5%, but still around historic lows.

Company-wise there will certainly be some interest in results from the big banks. ANZ is out with half year numbers on Friday. Across the Tasman, BNZ’s parent company NAB also has first quarter results. The banks have benefitted from a rising interest rate environment, and the questions will likely be around whether margins have peaked. There will be significant interest in outlook statements, and assessments of the ability of banks to grow earnings further as well as how impairments/asset quality is shaping up.

A busy week ahead.