Josh Gilbert, market analyst at eToro, shares his three things to watch in Australia in the coming days.
Q2 CPI AU (Wed)
This quarter’s CPI reading is the make-or-break moment ahead of the RBA’s August rate decision. It’s fair to say this is the most important data point Australia has received all year.
There’s no doubt the RBA’s job over the next few months remains difficult. Data points have been mixed, with unemployment climbing, but seeing strong employment additions and retail sales data coming in surprisingly strong.
Ultimately, the central bank is still reluctant to hike rates any further, with a hike likely to concede the fact the board may have made a policy mistake.
Meanwhile, pessimists are taking a “never say never” approach and believe that if inflation not only remains firm but starts moving upwards again, the RBA may act hawkishly to prevent rapid price escalation.
According to eToro’s Q2 Retail Investor Beat data, inflation remains the biggest concern for young Aussie retail investors and a growing proportion (34%) view inflation as the most significant external risk to their investments, so household anxiety around these upcoming figures is understandable.
Despite this doom and gloom, it’s important to remember that in the grand scheme of things, the world is fighting inflationary conditions right now and many central banks are holding firm on rates while pushing out the prospect of cuts but importantly, they’re also softening the prospect of additional hikes.
Economically, Australia is unlikely to break rank with the UK and US without a much more compelling reason than some uptick in quarterly inflation. The market consensus is for inflation to rise to 3.8% for the 2nd quarter.
Fed rate decision
As we approach the Fed’s rate decision on July 31, markets expect the Fed to hold interest rates steady, remaining unchanged at 5.25% to 5.50% for the eighth consecutive month. But, Jerome Powell has been clear that significant progress has been made on inflation, saying recently that the US is back on a "disinflationary path".
The progress on inflation has laid the groundwork for a September cut, which seems all but secured given the markets are pricing a 100% chance of a cut. This is significant because, for the last 14 years, the Fed has done exactly what the market has priced in every meeting.
With rates at a peak unseen in two decades, the Fed's commitment to curbing inflation seems unwavering but GDP data last week showed that the Federal Reserve is nearing closer to a soft landing.
With the market eyeing two rate cuts in 2024, and a third rate cut in January, the rotation trade is gathering further legs. That is clear in the performance of the Russell 2000 and the S&P 500, with the Russell up 10.15% and the S&P 500 falling 1.45% in the last month.
Despite confidence that inflation can return to target by 2026, previous inflationary spikes have disrupted expectations, delaying potential rate cuts. The way forward is not as clear as many would hope, but the Fed’s measured approach continues to inspire confidence.
Big tech - Microsoft (NASDAQ:MSFT), Meta, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL)
It’s a big week ahead with four of the magnificent seven reporting earnings. While most of the seven have seen glorious performances this year, last week ushered in some doubts over what we might expect this week.
Notably, Tesla’s shares dropped by over 11% when its earnings missed the mark, warning of notably lower vehicle sales in 2024, causing ripples of uncertainty throughout the sector. Alphabet (NASDAQ:GOOGL) also suffered a drop despite solid results, with investors questioning its spending on AI. However, those very investments could prove to be prudent.
Going into this week’s earnings reports, Microsoft in particular will have their work cut out for them in establishing an optimistic narrative, given next quarter’s results may be marred by the impact of July’s disastrous CrowdStrike outage.
Focus will be on the company’s AI ventures and the performance of Azure, its cloud computing platform - both of which are likely to be positive reports. Keep an eye out for capital expenditure figures, which Wall Street is concentrating on with Big Tech spending big.
AI will undoubtedly be the topic of the week across all four tech giants. Amazon is racing to develop a more cost-effective chip to compete with frontrunner NVIDIA (NASDAQ:NVDA) and Meta continues to integrate its own AI models into its apps and platforms.
Apple is accelerating its AI effort, integrating the technology into its new iPhone models, which is hoped will drive stronger sales in the second half of the year. However, news that its AI features may miss the initial launch of the new iPhone will be a disappointment.
Apple’s debut VR headset, the Vision Pro, has had an underwhelming consumer response and may fast become the company’s proverbial albatross without a significant expansion of use cases to justify its steep price point.
It hasn’t been a great start to Q3 for the Magnificent Seven, experiencing significant drawdowns, with an index tracking all seven stocks falling by 4% last week. However, it’s hard to ignore the track record these stocks have delivered when it matters, despite high expectations. These stocks have taken a punch, but don’t expect a ten count anytime soon.