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Episode details

Brendan Larsen
Good morning, it’s Monday 27th of February and I’m Brendan from Milford asset management.

Last week it was again evident that good news is bad news, with a myriad of data prints pointing to a more resilient US economy, implying a greater need for more tightening from the fed.

Firstly, we got flash PMIs earlier in the week which showed US business activity unexpectedly rebounded in February, reaching the highest level in 8 months. The composite increased back into expansionary territory at 50.2 from 46.8 in January and ahead of consensus at 47.5. The Services PMI increased to 50.5 from 46.8, signaling the first expansion since June last year, while the Manufacturing PMI printed at 47.8, a tick up from January but still in contractionary territory below 50.
We also got a read on the state of the consumer via the personal income and spending report, which added to the good news is bad news rhetoric. Personal spending increased 1.8% MoM vs expectations of 1.4%, outlining a robust consumer, albeit there may prove to be seasonal factor involved with the strength.
Later in the week we got another read on inflation via the personal consumption expenditure index, the Feds favoured measure of inflation. This printed hotter than expected, with headline PCE inflation rising 5.4% YoY vs expectations of 5%.
The implications of rebounding business activity, a robust consumer and strong inflation is a more hawkish Fed, hence rates markets sold off toward the back end of the week, sending yields higher and equities lower. The yield on the 10yr US treasury note finished the week at 3.94%, while the S&P500 closed at 3970, below the key 50 day moving average at 3980.

Elsewhere on the economic front,
The Reserve bank of New Zealand met last week in a much anticipated meeting, given the market came into it less confident in the outcome as a result of cyclone gabrielle impacts. In the end, the outcome was fairly straight forward – a 50bp hike in the official cash rate to 4.75% and guidance that the existing OCR track was still how the RBNZ expect rates to evolve. This implies that the RBNZ expect a peak rate of 5.5%, hence market pricing moved back up to meet this guidance.
We also got Australian wage data, which came in a touch softer than expected at 0.8% q/q vs consensus at 1%. Despite slowing from the September quarter , the print was the highest for any December quarter in the last 10 years, and as such has resulted in the highest annual growth in hourly wages since December 2012. This data is key for the path of Australian interest rates, so we will be watching how this evolves over coming months.
In equity news, reporting season in both Australia and New Zealand kept us busy last week.

Qantas reported first half profit before tax of 1.428bn, just below top end of their guidance and slightly above consensus. The strong result was driven via revenue growth across all divisions, but it was the domestic and loyalty divisions that were strongest. No dividend was declared, but Qantas increased their buyback by $500m taking the total FY23 buyback to $900m
Woolworths reported a solid first half, with EBIT up 18% YoY and 5% ahead of consensus. Strong cost management also assisted the result, with Woolworths slowing investment in data, digital and loyalty. The outlook was constructive, with Woolworths outlining their expectation for NZ second half EBIT to be above first half.
Dominos pizza was the worst performer in the ASX 200 last week, finishing down 25% after a 6% EBIT miss and poor outlook. Concerns already existed about the ability to pass on inflation, but the big negative was the outlook. Dominos noted second half same store sales growth is down 2.2% YoY and they removed profit guidance, raising further questions on earnings visibility.
Origin Energy updated the market last week to advise that the consortium has submitted a revised conditional and non-binding proposal at a price of $8.90 per share. This was a positive outcome given the revised bid is only 1.1% lower than the previous bid, and the stock traded up 12% on the back of it.

In New Zealand equities:
A2 Milk reported a mixed result, with headline revenue up 19% but a change in product mix toward the lower margin China label product away from the English label product. Management talked the market down from 20% EBITDA margins, which was taken poorly and resulted in the stock falling 7% on the day.
Auckland airport reported a solid result, outlining a faster than expected recovery. Revenue was 6% ahead of consensus, driven by higher PAX as well as retail and property revenue. Positively, management lifted guidance for FY23 net profit after tax to $125-$145m from $100-$130m.
Telecommunications business Spark reported a surprisingly weak result driven by higher COGS and weakness in cloud. EBITDA was 10% below consensus yet management retained guidance, implying they need an extremely strong second half in order to meet guidance.
In the week ahead:

The key data we will be watching is Australian GDP, China PMIs, and the ISM readings in the US for indicators on business activity.

Thanks for listening, we will see you again next week.

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