Share markets were supported by good economic data, solid US earnings results and ongoing signs that central banks are moving towards rate cuts albeit they are pushing back against imminent moves. 

 

This doesn’t mean there won’t be corrections though and the rise in shares with US and Australian shares hitting records after a brief consolidation into mid-January has left them overbought which together with positive investor sentiment leaves them vulnerable to a short-term correction as we come into the seasonally softer months of February and March. This is particularly so with key risks around recession, US banks and commercial property, the creeping expansion of the conflict in the Middle East, the Chinese property market and uncertainty about when central banks will start to cut rates, all of which could provide a trigger for a pullback. In fact, we saw a bit of the latter in the last week with the US share market initially falling after the Fed pushed back against expectations for a March rate cut. The Fed is not rushing to cut just yet, but still heading in that direction. Sure, Fed Chair Powell pushed back against market expectations for the start of rate cuts in March by saying it was unlikely as the Fed will want to gain further “confidence that inflation is moving sustainably towards 2%.” But that was hardly surprising as the March meeting is just six weeks away. Strong non-farm payroll figures on Friday night probably put pay to the notion of a March rate cut in the States.

 

Australian inflation is falling faster than the RBA expected. While hot spots remain (like insurance and rent) inflation fell to 4.1% YoY in the December quarter which is well below the RBA’s forecast for 4.5%, and down from 5.4% in the September quarter and a peak of 7.8% a year ago. Underlying inflation measures also fell with the trimmed mean at 4.2% YoY (below the RBA’s forecast for 4.5%) and services price inflation is now also following goods price inflation down. The plunge in Australia’s inflation rate is bringing it more into line with that in the US & Europe.

 

In Australia, the RBA on Tuesday is expected to leave the cash rate on hold and further relax its already mild tightening bias, but we don’t expect it to pivot just yet towards flagging rate cuts. 

 

Five of the “Magnificent Seven” reported quarterly earnings in the US last week. Of note:

 

Microsoft’s earnings were generally well received on the back of continued robust growth in Azure, helped by tailwinds from Generative AI.

 

Apple’s iPhone results were solid but there was some caution on the March quarter outlook, with headwinds in China.

 

Google rose in the wake of its results, despite weaker advertising revenue and higher capex forecasts.

 

Amazon beat expectations on most metrics, with the market positive on reacceleration in Amazon Web Services, its cloud division.

 

Meta was the standout with a notable AI tailwind, traction behind new initiatives, a $50 billion buyback and its first declared dividend.

 

The volume of earnings reports will continue this week.

 

A handful of Australian companies will also start to report December half earnings results including Amcor, AGL & Mirvac in the week ahead. Consensus expectations are for a 4.9% fall in earnings for 2023-24 driven by a sharp fall in energy sector profits but with strong gains in profits for utilities, health care and industrials. Key to watch will be guidance around how the consumer is holding with high interest rates and cost of living pressures.

 

Overall we are expecting some form of pull back in share prices in the coming months. The year should provide for positive returns at a modest level. It is likely to be rougher and more constrained ride than last year.