Stellar Q2 earnings season for the US
09-08-2021
George Lucas, Raiz Group CEO
In the US, 80 per cent of S&P 500 companies have now reported second-quarter results, with a record 86 per cent exceeding expectations on profits, according to data from S&P.
Technology, healthcare and consumer discretionary groups have led the way, with more than 90 per cent of the sectors’ reporting companies posting profits that beat expectations.
This very positive news has not driven large share price gains in the S&P500, which has risen more than 30 per cent over the past year and remains near its all-time highs, helped by low interest rates.
Interestingly, there has also been a lack of upgrades to forward earnings estimates for the coming quarters and this is probably the main reason we have not seen a rally in SP500 stock prices.
US payrolls lift 943,000 in July
Still in the US, hiring rose in July at its fastest pace in nearly a year, with a 943,000 surge in US non-farm payrolls in July, and upward revisions to previous months’ gains. The numbers indicate that jobs growth has shifted into a higher gear and that a drag on hiring from labour shortages is easing.
The upbeat jobs data suggests that economic growth in the US may be holding up better than many expected, considering a falling unemployment rate that’s currently at 5.4 per cent.
Also, the surge in annual wage growth suggests that the US Federal Reserve could now begin tapering its asset purchases later this year, which is sooner than the market had previously expected.
On the political side, the Congressional Budget Office announced that the bipartisan infrastructure bill will add USD 256bn to the budget deficit over the next decade. This does not appear to have derailed the chances of the bill passing the Senate, with a key vote to advance it expected soon.
Indonesia rebounds from recession
Elsewhere, Indonesia continued growing in the second quarter, reporting Q2 GDP data that was up more than 7 per cent year-on year. However, a recent surge in virus cases is likely to cause output to contract again in Q3.
Meanwhile, I expect we will learn this week that GDP contracted in Malaysia in Q2, owing to an earlier spike in virus cases than Indonesia, and stricter containment measures.
Turning to Australia, exports of goods and services rose by 3.6 per cent month-on-month in June, while imports rose by a smaller 0.8 per cent. That said, given most of the rise in exports is driven by higher commodity prices, net exports probably provided another drag on real GDP growth in Q2.
The rise in real retail sales in Q2, which lifted 0.8 per cent for the three months to June, is consistent with a further rise in consumption in Q2. Looking ahead, I suspect consumption will fall back in Q3 given recent lockdowns, including in Sydney and Melbourne.
On the currency, I am not sure how much further the AUD/USD can fall but I think that the RBA’s relatively hawkish stance will not be enough to prevent further falls in the Aussie dollar.
The currency is being impacted by significant uncertainty about both the domestic recovery and the global outlook, especially in China, which will probably continue to weigh on the Aussie dollar.
Regarding the inflation outlook, I expect July CPI data to show another strong monthly rise in prices.
Australian economy set for more pain from COVID-19
Given Australia is pursuing a “zero COVID” approach, it means even small outbreaks of COVID lead to much greater economic disruption than in Europe, or US where governments have, for the most part, continued to lift restrictions despite the virus’ Delta variant lifting infection numbers.
This strategy is not possible in Australia due to the country’s low vaccination rates and previous COVID-19 infection numbers. Only time will tell the economic impact of these most recent lockdowns.
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