The recent Australian reporting season was not the negative event anticipated by the market. While the market has downgraded earnings by around 3% post reporting season, the market had been expecting earnings downgrades of around 15%. What was evident across the mix of results was that while top lines generally held up well, margins softened in the face of higher costs and currency. Currency exposed industrials saw the largest downgrades, while financials and resources continued to report good quality numbers. Consumer exposed companies saw the biggest weakness in revenues and margins, which was as expected. What did surprise was the number of companies that maintained their guidance, although it may well be that earnings forecasts will fall further as we move through financial year 2012.
Two major themes to emerge from reporting season – higher wage growth and the soft consumer – highlight the dilemma facing the RBA. Inflation fears in the face of full employment and high wage growth, are being countered by poor consumer sentiment, a high AUD, negative economic indicators, and of course, concerns about global growth and the European debt crisis. This dilemma led the RBA to again hold rates at 4.75% yesterday, unchanged since November last year. This is likely to be the case into the end of the year.
That is not to say easing is off the table if RBA concerns over domestic and global growth accelerate. With the negatives of soft housing activity, house prices, credit and consumer data, there is a chance the RBA could cut if inflation begins to moderate. But with recent strength in sales and wages, together with yesterday’s RBA statement, a cut before end year appears less likely. However, the RBA is perhaps the best placed central bank in the world to respond to any substantial crisis, with ample scope to ease rates and stimulate the economy. In today’s circumstances, that isn’t a bad problem to have.