On earnings season, interest rates and chastising central bank bosses
It’s a bit like the Strait of Messina in Homer’s Odyssey. On one side of the Strait is Charybdis, a sea-monster that creates giant whirlpools that suck you down and spit you out giving the feeling of eternal drowning. On the other side of the strait is Scylla, who would snatch six people from your ship. The idea was to not sail close enough to earth and to find a route that avoided both.
Let’s consider these two mythological creatures from the epic book as “profit warnings” and “forward guidance” during earnings season.
The current US reporting season is coming to an end. The US-listed corporates report quarterly (which is every 12 weeks). On one hand that’s a lot of work for all those concerned at each company, but on the other hand it gives management a lot of opportunity to guide investor and shareholder expectations better so as not to give downside surprises in particular – markets don’t like negative surprises (just ask Estee Lauder, Dish TV, Match or On Semiconductors which disappointed ie 30% shortfalls in earnings in some cases, this season). Despite those air pockets, the US 3Q reporting season has been rather robust overall. More than 80% of companies had a positive earnings surprise (strong Consumer Discretionary and IT sector results offset the weaker reports from the Health Care sector) with earnings exceeding estimates by a touch over 5%, its 11th consecutive quarter of growth. Driving this, Big Tech (top line revenue growth in the teens), Payments (+20%) and the white-hot Pharma / weight-loss drug names (Eli Lilly and Novo Nordisk), our favourite luxury names (Ferrari and Hermes) showed revenue growth of +30%. It’s simply amazing that companies as large as Amazon and Meta can increase their 3Q EBITDA by some 40%.
Closer to home, New Zealand, and Australia listed companies (must) report twice a year – that’s 180 days between accompanying management guidance in most cases (ex AGM updates) which is a long time between drinks so to say and allows for large air pockets when things don’t turn out as planned. The first Trans-Tasman companies out of the blocks are: Xero, Mainfreight, James Hardie and National Australia Bank. The big end of town in terms of market capitalisation is well-followed and understood, the small end of town is much less so. Note, some 50% of companies in Australia have suffered share price falls this year and the number is over 60% for New Zealand companies.
On Interest Rates
Last week in the US, Federal Reserve Chairman Jerome Powell kept the US Fed Funds rate on hold (which was largely expected) and market commentators and participants took the read that this was the moment of “peak” rates. We’ve been waiting a while for this…and this view looks to have led to the S&P500 having its best six-day rally seen so far this year (+6.4%). It helped that earnings season was at an end, November is seasonally a better month for returns and tax-related selling ended 31 October. The US dollar sold-off on the back of this (the rate differentials vs other markets initially look less favorable albeit at first, it’s just a knee-jerk market reaction).
Across the ditch, the Reserve Bank of Australia (RBA) played chicken with the market on Tuesday, sticking to its word of committing to fight inflation (it had a stronger-than-expected CPI print two weeks ago), it lifted its cash rate by 25 basis points to 4.35%. If the RBA hadn’t hiked, it would have certainly lost some credibility (recall Australia appointed a new RBA Governor in Michele Bullock on 18 September 2023). Arguably the RBA has been ‘behind the curve’ and is playing catch-up. Some might say late to the game – the RBA has hiked rates from a seemingly impossible 0.10% in May 2022 to 4.35% on Tuesday – that’s a mere 526 days!
The New Zealand interest rates situation has been a similar story with the Official Cash Rate down at just 0.25% in March 2020 and now at 5.50%. Whilst New Zealand was amongst the first countries in the world to hike interest rates it might be the first to cut – I certainly hope so as I’m not sure how the economy can handle interest rates at these levels for too long.
Usually when talking about rate hikes and cuts, we refer to “up the stairs and down the escalator”. Said another way, we slowly hike interest rates as the economy heats up and when things blowup and we need to stimulate, we cut rates fast. Again, let’s hope so.
You need only go back five years to when the Swiss banks were actually charging clients to have money on deposit (negative interest rates) and Austria cleverly issued €9 billion of 100-year bonds (currently trading at 40c in the dollar reflecting the subsequent increases in rates). If only other Governments had done the same thing (especially New Zealand and Australia to create a 30-year mortgage market). The legendary investor, Stan Druckenmiller, recently came out publicly chastising US-Treasury Secretary, Janet Yellen, for not issuing bonds when rates were virtually zero saying “I literally think if you go back to Alexander Hamilton (Founding Father of the United States who served as the first Secretary of the Treasury from 1789 to 1795) it was the biggest blunder in the history of the Treasury. I have no idea why she’s not been called out on this; she has no right to still be in that job after that.”
Whether investors similarly chastise Reserve Bank of New Zealand Governor Orr in due course will remain to be seen.