US Federal Reserve speeches; Profit reporting season

  • Senior US Federal Reserve officials have laid the groundwork for higher interest rates.
  • The company profit reporting season still has three days to go. But it is clear that the majority of big companies have recorded solid results despite some high profile exceptions.
  • CommSec has assessed all of the companies in the S&P/ASX200 index that have reported earnings, not a subset. Excluding BHP Billiton, aggregate profits are up 8.5 per cent; almost 86 per cent of companies have recorded a profit; and a record 92 per cent of companies have paid a dividend.

US Federal Reserve speeches: What happened and what does it all mean?

US Federal Reserve chair, Janet Yellen, has delivered a 22-page speech: “The Federal Reserve's Monetary Policy Toolkit: Past, Present, and Future.” The speech had been eagerly awaited for a week in the hope it would provide guidance on interest rate changes. Which it did, of sorts.

Janet Yellen said “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” At face value that puts rate hikes on the agenda for the September, November and December policymaking meetings. But then Yellen noted that monetary policy wasn’t on a pre-set course; that rate hikes depend on the economic data; and the economic outlook remains uncertain.

Actually, the section “Current Economic Situation and Outlook” accounted for only around two of the 22-page speech. The remainder of the speech focussed on how the monetary policy toolkit had to expand after the global financial crisis and may need to expand further in the future.

Also the US Federal Reserve Vice Chairman Stanley Fischer conducted an interview with CNBC. According to MarketWatch: “Asked during an interview on CNBC if investors should be on the edge of their seats for a rate hike as soon as September and for more than one rate hike this year, Fed Vice Chairman Stanley Fischer replied: “I think what [Yellen] said today was consistent with answering yes to both your questions, but these are not things we know until we see the data.”

Fischer noted that the next set of unemployment figures (released this Friday) will be important in forming the rates decision. But when asked whether the soft economic growth figures will affect the decision, Fischer deflected, noting that policy must be forward looking.

At the end of the day, investors and analysts will go back to watching the data with the next major test being the non-farm payrolls or employment data on Friday.

Both speeches certainly made for volatile sessions on US sharemarkets and currency markets. The US Dow Jones ended lower by 53 points but after tracking a 237 point range.

The Aussie dollar fell from highs near US76.90 cents to US75.50 cents and ended US trade near US75.65 cents.

The Profit Reporting Season

There are three more days until the end of the profit reporting season. CommSec has analysed all results from ASX 200 companies. Traditionally brokers or analysts focus on smaller subsets of results. And some merely focus on just whether companies have met or fallen short of “market expectations”. Below we provide early results.

So far, 128 companies from the S&P/ASX 200 have reported profits for the year to June. Including all companies, profits fell 15.1 per cent over the year to $30.4 billion. But a significant distortion is imparted into the results from BHP Billiton. The mining heavyweight swung from a profit of US$1,910 million to a loss of US$6,385 million. To include BHP Billiton in the aggregate results would present an incorrect picture of the earnings season.

Some of the key results:

  • Excluding BHP Billiton, aggregate profits rose by 8.5 per cent to $36.8 billion.
  • Average earnings per share rose by 2.2 per cent.
  • Aggregate sales were up by 2.9 per cent over the year; aggregate costs/expenses were up by 2.7 per cent.
  • All but 11 companies recorded a profit for the year to June: 85.9 per cent of companies recorded a profit.
  • 64.8 per cent of companies increased profit over the year; above the long-term average near 60 per cent.
  • Aggregate cash holdings rose by 0.9 per cent to $72.8 billion.
  • Aggregate dividends rose by 7.9 per cent over the year.
  • 92.2 per cent of companies (118 of 129) paid a dividend.
  • Of companies paying a dividend, 67.8 per cent lifted profits; 16.9 per cent maintained dividends; and 15.2 per cent of companies cut dividends.

What are the implications for interest rates and investors?

US Federal Reserve officials are laying out the case for higher interest rates. The key reason why rates haven’t been lifted to date is low inflation. Core inflation is running at a 1.6 per cent annual rate and hasn’t looked to threaten the Fed’s 2 per cent goal.

The rhetoric used by Fed policymakers is designed to re-assure consumers and businesses. The Fed doesn’t want to frighten Americans – that is why policymakers painstakingly outline the justification for higher rates and reassure that rate hikes will remain gradual.

Investors need to take care to ensure they know the full story of the recent earnings season. Simply, most companies have reported profits; the proportion of companies reporting higher earnings is above long-term averages; and a record number of companies have paid dividends.

While it is reported that earnings results have fallen generally fallen short of so-called “market expectations’, that may reflect the quality of expectations as well as the small number of analysts providing forecasts. Certainly the Australian sharemarket hasn’t weakened over the reporting season. Since the profit season began in late July, the Australian sharemarket has lifted by just under 1 per cent.