News Analysis: US cuts rates; Australia's employment jumps; Myer’s profit falls

Welcome to the essential investor brief, featuring handpicked news for the week ending 20th September 2024.

This week's highlights include:

-US Fed goes aggressive: The Fed's super-sized rate cut might seem like a win for investors, but with inflation still sticky and GDP growth robust, it raises red flags about US economic health. The move appears to be more of a pre-emptive measure to ensure a soft landing, as the US labour market is showing signs of softening.

ECONOMY & FINANCE

The resilient local jobs market suggests the RBA is unlikely to mirror the Fed's recent rate cut.

News highlights

The US Federal Reserve cut its benchmark interest rate by 0.5%, lowering it from 5.3% to 4.8%. This marks the first rate cut in four years, aimed at supporting the slowing job market.

• Takeaway: The rate cut seeks to balance economic support with ongoing inflation concerns, as core inflation remains above the Fed’s 2% target. Investors should brace for a complex environment where inflation and growth dynamics are closely intertwined.
  
  

Australia's economy added 47,500 jobs in August, keeping the unemployment rate steady at 4.2% and participation at a record 67.1%. Despite a 25% decline in job openings since mid-2022, vacancies are still significantly higher than pre-pandemic levels.

• Takeaway: The robust job numbers and high participation rate point to a gradual slowdown in the labour market. As a result, the RBA is expected to keep interest rates steady in the near term.

US fintech start-up Intelligent Alpha is launching an AI-powered ETF that uses ChatGPT, Gemini, and Claude to emulate legendary investors like Warren Buffett. The ETF will invest in 60-90 global companies, with human oversight ensuring regulatory compliance.

• Takeaway: Intelligent Alpha's AI-powered ETF offers a novel way to access the strategies of famous investors like Buffett. However, its experimental nature poses risks, as AI in portfolio management remains largely untested.
  
  

CORPORATE NEWS

Myer faces a steep profit decline as a pullback in consumer spending challenges discretionary retailers.

News highlights

Myer reported a 28% drop in net profit to $43.5 million for FY24, with total sales falling 2.9% to $3.2 billion. The company declared a reduced dividend of 0.5¢ per share, citing challenging market conditions.

• Takeaway:Ongoing market challenges for discretionary retailers are evident in Myer's profit decline. Economic pressures and changing consumer behaviour continue to impact retail sales, suggesting caution is warranted when evaluating investments in this sector.
  
  

Mineral Resources is exploring potential joint ventures or sales for its Lockyer gas project in Western Australia, with analysts estimating it could be valued between $500 million and $900 million. The project boasts an estimated 435 petajoules of gas resources, making it one of the region's largest discoveries.

• Takeaway:Mineral Resources’ bullish gas estimate for the Lockyer project suggests significant potential value. A successful deal could improve liquidity and strengthen the company’s balance sheet.

Woolworths is facing calls from investors to sell its discount chain Big W and its New Zealand operations to concentrate on its local supermarkets, which have lagged behind Coles.

• Takeaway:Investors could see increased value in Woolworths if the company streamlines operations. Simplification could lead to better returns and stronger market positioning.

Macquarie will pay nearly $80 million to settle SEC allegations that it inflated the value of 4,900 mortgage-backed securities and favoured certain clients from 2017 to 2021. Macquarie will also undergo a comprehensive review of its securities valuation practices.

• Takeaway:Macquarie's settlement and review indicate heightened regulatory scrutiny, which could lead to improved transparency and risk management. While the fine addresses past issues, the commitment to review suggests a focus on improving governance moving forward.

Iron ore prices may drop below $US80 a tonne, potentially forcing higher-cost mines to shut down amid China’s steel crisis. Iron ore futures recently hit $US89.25, down over 35% this year.

• Takeaway:Falling iron ore prices could hurt mining company profits. However, Chinese economic stimulus efforts may help stabilise prices, leading to short-term opportunities in mining stocks.

Rabobank warns the global potash market is oversupplied, driving prices down 13% this year and potentially forcing producers to cut output. This threatens BHP's expansion plans in the sector, though the company remains committed to its long-term strategy.

• Takeaway:The oversupply in the potash market and falling prices present risks, particularly for companies like BHP with its significant investments in potash projects. Lower prices could impact profitability, potentially delaying project expansions.
  
  

Until next time...