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Episode details

Brendan Larsen
Good morning, its Monday 6th February and I’m Brendan from Milford Asset Management.

Last week there was plenty for investors to get their teeth into, from central bank meetings and macro data to US corporate earnings.

On the central bank front, the US Federal reserve hiked the fed funds rate by 25 basis points to between 4.5%-4.75%. Changes in the statement outlined the Committees focus has shifted from the pace of rate hikes to the extent of future increases, with some participants interpreting this as meaning hikes in excess of 25bp are all but ruled out going forward in this tightening cycle. In contrast to the hawkish statement, the press conference showed some dovish signs. Powell was at pains to talk to the disinflation we are seeing come through in recent data points, and rather than push back on recent easing of financial conditions, he noted that conditions had tightened significantly over the past year. The market certainly interpreted these comments in a dovish light, with the Nasdaq rallying 3.5% and the S&P500 rallying 1.5% on the day.
The Bank of England Monetary Policy Committee raised the bank rate by 50bp to 4%, however removed a lot of the more hawkish language from the last statement. The removal of the word ‘forcefully’ from the statement suggests the bank are likely to step down to 25bp hike increments going forward, and the comment about looking at the impact of the significant increase in bank rate so far implies the bank feels its closer to the end of the tightening cycle. The shift in language is unsurprising, given the material fall in UK Natural Gas futures since December, meaning household energy bills are likely to fall below the energy price guarantee from the second half. This eases the inflationary burden, thus requiring a less aggressive monetary policy reaction than it may have.
Finally on central banks, the European Central Bank met last week and hiked the deposit rate by 50bp to 2.5%, while reinforcing the intention to raise rates by another 50bp in March. The tone was generally more hawkish, with the bank noting that core inflation was still too high thus there was more work to be done.
In economic data:

The key release of the week was Fridays US Non-Farm Payrolls, which surprised the market by printing at a huge 517,000 vs expectations of 188,000. Importantly, average hourly earnings printed inline with consensus at 0.3% MoM, but the huge rise in payrolls does suggest that rate hikes have had a much smaller impact on the less interest sensitive areas of the economy and more tightening will be required.
In New Zealand, we got a read on the state of the employment market which outlined a still very strong market but the data was a touch softer than economist expected. The unemployment rate printed at 3.4% vs expectations of 3.3%, but it was the average hourly earnings number that perhaps surprised most – printing at 0.9% vs 2.6% in September. The slowdown in wage inflation is likely welcomed by the RBNZ, but the labour generally remains very tight.
It was a busy week on the corporate earnings front, with the major US tech names reporting.

META came at the start of the week, with a renewed strategy focused on delivering a structurally more efficient company. Management outlined FY23 opex and capex guidance 5% and 12% lower respectively, outlining this focus on efficiency. In fact, META management said the word ‘efficiency’ over 25 times during the earnings call. The market clearly liked what they heard, with the stock up 23% on the day – the largest single day gain in nearly 10 years.
Unfortunately for tech bulls, the positivity stopped there. Apple, Amazon and Alphabet all reported results later in the week, which outlined that a slowing economy was weighing on demand. Apple missed earnings estimates for a range of reasons, including FX, supply constraints and broader macro challenges. The guidance for another quarter of revenue decline also disappointed the market, and implies a negative 21% quarter on quarter decline. For amazon, the slower than expected amazon web services growth and margin compression increased investor concerns around cloud, which resulted in the stock falling over 8%.
In Australian equities,

Insurer IAG provided renewed guidance on the back of the terrible flooding in New Zealand last week. IAG reported in excess of 15,000 claims for Auckland floods, which suggested they would therefore breach the $236m retention. The result is a revision to FY23 reported insurance margin from 14-16% to 10%, a material decrease. The stock finished the week down 7%.
Flight Centre came to the market to raise $180m to fund the acquisition of UK leisure business Scott Dunn. Flight Centre also provided a trading update, noting first half EBITDA of $95m, 17% ahead of consensus and above their guidance of 70-90m. They also provided FY23 EBITDA guidance of $250-$280m, broadly inline with consensus but implying a weaker second half versus forecasts.
Software business Megaport delivered disappointing results last week, outlining further slowing of key metrics. The business added just 39 customers in the quarter, the lowest ever. Ports additions were also soft, at 203 for the quarter versus expectations closer to 400. Management noted recent weakness in gross additions is likely down to economic conditions slowing customer decision making . The market clearly wasn’t happy at the poor metrics, with the stock down 25% on the day.

In the week ahead,
The key event for us is the RBA on Tuesday, where the market is pricing an 80% chance of a 25 basis point rate hike. We have seen somewhat conflicting data in Australia in recent weeks, with extremely strong wage growth data but very poor retail sales, so it will be interesting to see how the RBA interpret this.
Elsewhere we will be watching UK GDP, European retail sales and the remaining US corporate earnings.
Thanks for listening, we will see you again next week.

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