Devon Funds Morning Note - 13 September 2024

Friday 13th September 2024

The coast is clear

Global

The US indices pushed higher for another day as the wholesale inflation data came in line with expectations. The lack of any nasty surprises in the CPI or PPI data paves the way for the Fed to cut rates next week, albeit possibly by 0.25% rather than a 0.5% trim. Gold prices have hit a record high on a resulting weaker outlook for the US$. The S&P500 rallied 0.8% while the Nasdaq jumped 1% with mega-cap tech in demand. Nvidia, Alphabet and Meta all gained around 2% or more. The Dow was 0.6% higher. European markets jumped as the European Central Bank came through with another rate cut.

The US Producer Price Index increased 0.2% in August at the headline level, which was in line with expectations. However, just as with the CPI, core PPI was slighter hotter than estimates. Excluding food and energy, core wholesale inflation increased 0.3%, ahead of expectations for 0.2%. Services prices remain somewhat sticky as does “shelter” with a 4.8% jump in guestroom rental. Goods prices were flat on the month, reversing a 0.6% gain in July. On a 12-month basis, headline PPI rose 1.7%, while at the core level the rate was 3.3%.

With inflation continuing to moderate at the headline level, the coast is clear for the Fed to cut rates next week. A cooling in the labour market will add to this notion. Initial filings for unemployment benefits rose 2,000 to 230,000 last week, higher than the 225,000 estimate. Continuing claims rose by 5,000 to 1.85 million.

Persistence in some areas of core inflation could though mean the central bank reduces rates by 25bps as opposed to 50bps. The Fed’s key overnight borrowing rate is currently targeted in a range between 5.25%-5.5%. Of particular interest next week will be the signalling around the pace and extent of rate cuts going forward. Markets are currently pricing in 100bps of cuts by the end of 2024.

A reduction in rates will be welcomed by much of the economy, and borrowers, which includes the US government. Figures from the Treasury Department showed that, with one month left in the fiscal year, the US government has spent more than US$1 trillion on interest payments for its US$35.3 trillion national debt. This is the first time this has happened.

Debt servicing costs of US$1.049 trillion are up 30% on a year ago. After subtracting interest earned, net interest payments were US$843 billion, which is higher than any other expenditure category except Social Security and Medicare. This jump in debt service costs is also while the budget deficit is approaching US$2 trillion for the full year.

US households are a bit better off. Net worth hit a fresh record of US$163.8 trillion in the second quarter, a 1.7% increase, and nearly US$11 trillion higher than a year ago. It was driven by a jump in real estate holdings of US$1.8 trillion, while stock holdings increased ~US$700 billion. Debt levels though also rose. Total household debt moved higher by 3.2%.

Expect to hear more about how good (or how bad) the world’s largest economy is at present as the election draws nearer. Donald Trump though posted on Truth Social on Thursday that there will not be another debate against Kamala Harris. He said he won the first debate and cited as evidence the Harris’ campaign challenge for another debate. Trump wrote, “When a prizefighter loses a fight, the first words out of his mouth are, ‘I want a rematch.’” Interesting claims were also being made by Trump’s running mate. JD Vance claims 25 million unauthorized immigrants have entered the US. Data from the Department of Homeland Security’s Office of Homeland Security Statistics puts the figure at 11 million at last count.

Stock wise Moderna was on the back foot, falling 12% after it announced plans to reduce expenses by around US$1.1 billion by 2027 to around US$3.7b. The biotech giant is adjusting to life after the Covid boom. Moderna expects 10 new product approvals through to 2027, but is “pacing itself with respect to new research and development spending. There was better news for Gilead (+2.7%) whose twice yearly HIV drug delivered strong results in a Phase 3 trial. Novo Nordisk shares were also higher on news that its experimental anti-obesity pill could be more effective than its existing Wegovy injection.

Elsewhere, shares in Alaska Air Group were higher after the airline raised its third-quarter outlook, citing strong summer demand. Shares of the supermarket chain Kroger surged 7% on a better than expected earnings result. Americans are also still spending on their pets with vigour. Shares in pet retailer Petco soared 11%, adding to a 33% surge on Wednesday following a strong result.

Across the Atlantic European markets rallied with the STOXX50 jumping 1.1% The ECB delivered a quarter-point interest rate cut, marking its second reduction this year. The move had been widely anticipated amid falling inflation back toward the central bank’s 2% target, and weak economic data. The ECB lowered its 2024 growth forecast to 0.8%, down slightly from an earlier projection of 0.9%. The Governing Council though said it was “not pre-committing to a particular rate path,” and said future moves would be on a data-dependent, meeting-by-meeting, approach.

In the UK, the FTSE100 rose 0.6%. UK house prices experienced their first rise in nearly two years. Oil majors BP and Shell ticked higher as crude prices jumped over 2% as Hurricane Francine disrupted production in the Gulf of Mexico. The International Energy Agency meanwhile said that global oil demand was slowing “sharply. The Paris-based body said demand rose by 800,000 barrels per day year-on-year in the first half of 2024, significantly lower than the 2.3m recorded in 2023, and the lowest since 2020. The IEA said the "chief driver" of the downturn in demand was China.

In Asia, the Hang Seng gained 0.8% and the Nikkei soared 3.4%, rebounding from recent weakness. Chipmaking companies were in demand across Asia following the bullish comments made by Nvidia’s CEO about the outlook for AI demand (see yesterday’s note). Shares in Japanese technology conglomerate Softbank, which owns a stake in chip designer Arm, soared 8%.

New Zealand

The Kiwi market had a very strong session, with the NZX50 leaping 1.5% to 12,820. That is a 32-month high for our index. The gains were driven by Fisher & Paykel Healthcare which soared 2.8% to a new record high. The healthcare giant now accounts for nearly 18% of the index. The recent earnings upgrade has taken our largest company by market cap above the pandemic highs. FPH is enjoying strong tailwinds beyond Covid.

Infratil also hit a record with a 1.7% gain. Contact Energy also rose 1.7% and Mercury NZ gained 2.2% as did Fletcher Building. Freightways rallied 2.7% and EBOS jumped 1.6%.

Fisher & Paykel is now worth over $6b more than the next biggest stock on the exchange being Meridian. The gentailer has released its monthly operating report this morning. Wetter weather has seen national hydro storage increase from 45% to 99% of historical average. Meridain’s monthly total inflows were 119% of historical average. Retail sales volumes in August were 3.2% lower than a year ago. Segment sales increased in agriculture by 4.4% and large business by 7.1%, with decreases in residential (-4.6%), small medium business (-1.2%) and corporate (-6.9%).

On the data front, Stats NZ released selected price indexes which cover roughly half of the CPI basket (45%) – but very much covering tradeable inflation, not non-tradable inflation. Food prices rose 0.2% and 0.4% year on year – food comprises just under 20% of the CPI basket. Rents (around 9.5% of the CPI basket) rose 0.3% and 4.3% y/y. Alcohol and tobacco (7.1% of the CPI basket) were unchanged month on month. In total, consumer prices rose 0.3% in the month. The overall theme is one of inflation continuing to moderate. The Q3 CPI due in a few weeks may make the coast even clearer for further rate reductions by the RBNZ. Annual inflation is well within the 1-3% target range and getting very close to the 2.0% midpoint.

While inflation is moderating, and rates are starting to come down, consumers continue to be selective it seems. Total electronic card transactions for the month of August fell 0.2% and are now down 0.9% y/y. Retail ECT were up marginally at 0.2% but down 2.9% y/y. It is fair to say that household spending is subdued. August should reflect the tax change that came into effect on July 31.

Durables spending picked up slightly (0.5%), as did apparel but this follows very weak spending in both categories. Hospitality spending was down and motor vehicles spending also. It seems as though kiwi households are continuing to prioritise spending. It is positive that the month saw a small increase, but the green shoots have yet to arrive in earnest.

That said, results this week from Briscoes were solid, as was a recent update from Hallensteins. Numbers from Kathmandu and the Warehouse will be in focus the week after next to see how other big retail names are faring.

Australia

The Australian market leapt on Thursday, with the ASX200 closing up 1.1% to 8,075. All sectors were in the green with technology (Wisetech hit a new record high) and energy both up more than 2%. The SPI futures are pointing to another strong gain on the open for the index.

Shares in uranium miners were in demand again after Vladimir Putin threatened to cut exports of the commodity as retaliation for Western sanctions. Paladin Energy soared 9%. Lithium miners were sought after for a second day on reports that a major EV battery maker in China has suspended production at some sites. Lithium futures hit their highest level in a month. Mineral Resources and Pilbara Minerals both surged around 8%.

BHP faded 1.4% as the shares went ex-dividend, but there was some good news for the sector. Brazilian miner Vale has increased its forecast for iron ore output this year after a stronger-than-expected first half.

Energy stocks were boosted by the rise in oil on hurricane activity in the Gulf of Mexico. Woodside Energy rose 2% even as it temporarily ceased production at its Shenzi oil and gas field in response to severe weather in the region.

On the downside, brick manufacturer Brickworks fell 1.8% after the company recognised a $123m impairment due to a severe deterioration in building activity in Australia and parts of the US.

There were positive reactions to exec departures. Nine Entertainment added 0.8% as the company announced its CEO was departing, while the stock also traded ex-dividend. Health insurer NIB jumped 3% cent after its CEO announced he would step down in November after more than two decades at the helm. Aussies generally are still on the move. The ABS reported that overseas trips in July were up 15% on a year ago.

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