ASX 200 tumbles on another unexpected RBA rate hike + One defiant retail stock trying to break out

The RBA hikes rates for the 12th time despite expectations of a pause, Lowe hints that "some further tightening" may be required, retail stocks are getting obliterated following trading updates (but there's one trying to break out into a two-year high), Goldman Sachs is bullish on radiology stocks and Morgan Stanley's take on the building sector.

Let's dive in.

ASX 200 Session Chart

ASX 200 opens lower and tumbles post RBA hike (Source: Market Index)

Markets

Here we go again. The RBA has made its second consecutive unexpected rate hike (consensus expected a pause in both the May and June votes). The market has to now recalibrate for another episode of 'higher for longer' and "some further tightening" as Lowe suggested. The ASX 200 fell as much as 2.6% in the three days following the May hike. Will we see the same kind of follow-through selling in the coming days?

Economy

The RBA hiked interest rates by 25 bps to 4.1%.

• Markets were leaning towards a pause but the likelihood of a hike was ~40%

• “This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.” – RBA Governor Philip Lowe

• “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

Latest news

Market Insights: Retail Depression

If a retail stock releases a trading update, you better start running for the hills.

There's been no shortage of depressing trading updates from ASX-listed retail names. A few recent examples include (plus share price performance on the day of the announcement):

Universal Store (ASX: UNI)

• 24 May -23.9%

• "Despite a deteriorating macro environment, and increasingly clear signs that the youth customer is seeing pressures on their discretionary spending levels ..."

• "More recently, trading conditions observed throughout April and May to date have further tightened indicating that some customers are reducing their spending. The Group expects this subdued environment to continue for the balance of FY23 and into FY24."

Adairs (ASX: ADH)

• 2 June -14.9%

• "After a solid sales performance in 1H FY23, the impact of rising interest rates and higher cost of living has created a more subdued trading environment since April with lower traffic observed both in stores and online."

Baby Bunting (ASX: BBN)

• 6 June -16.9%

• "The key Storktake promotional event, which has recently commenced, has seen trading both in stores and online well below expectations during this short period."

• "Since launch, sales have been unprecedentedly low, with comparable store sales of around negative 21.0%"

Surprisingly, there is one retail-ish stock that's held up relatively well and trying to break out into two year highs. And that's Kogan (ASX: KGN).

Kogan price chart (Source: TradingView)

Kogan's trading update on 26 April helped the stock rally as much as 30% by 2 May.

The update was depressing (but well documented and within expectations) with sales down 28% year-on-year to $188.7 million for 3Q23.

But what's interesting is that Kogan initiated an on-market buy-back program of up to 10% of its issued shares, commencing 12 May 2023 to 10 May 2024.

We now see daily "Update - Notification of buy-back" from Kogan. So the question is, is the stock holding up because the company is buying back its own shares?

Interesting news and movers

Trading higher

• +21.4% Structural Monitoring Systems (SMN) – Discussions with Boeing

• +18.9% Sigma Healthcare (SIG) – Agreement with Chemist Warehouse

• +15.7% Musgrave Minerals (MGV) – WGX takeover offer

• +2.3% A2 Milk (A2M) – SAMR re-registration

• Uranium sector move: Bannerman (+7.1%), Deep Yellow (+5.9%)

• Coal sector move: Terracom (+5.4%), Whitehaven (+4.4%), Yancoal (+4.3%)

Trading lower

• -16.3% Baby Bunting (BBN) – Guidance

• -11.1% Ebos Group (EBO) – Chemist Warehouse to not renew contract

• -9.8% ASX (ASX) – Guidance

• -5.6/% Domain (DHG) – Downgraded by Barrenjoey

• -5.2% Cooper Energy (COE) – Production guidance

• -3.8% Elders (ELD) – ABARES June quarter crop report

• Discretionary stocks move: Accent (-5.9%), Lovisa (-3.6%), Harvey Norman (-2.9%)

Broker notes

Goldman Sachs on radiology stocks:

• “A top line recovery to historically defensive 4% volume growth.”

• “Margins to bottom in FY23E, then recover >200 bps as volumes return.”

• “Long-term outperformers are those with leading operating efficiency and capital deployment strategies.”

• “Capitol Health (CAJ): Initiate at Buy; 12m TP of A$0.33 (+18% upside).”

• “CAJ is the sixth largest player in a structurally attractive industry and is a low cost community-based provider of radiology (underpins stable and defensive cash flows that are 77% government backed).”

• “Integral Diagnostics: Reiterate Buy; 12m TP of A$3.70 (+14% upside).”

• “We believe the market is under-appreciating the recovery in margins given our positive outlook on price/mix tailwinds/cost discipline.”

Morgan Stanley on building stocks:

• “After a wet 2022, the first five months of CY23 have seen materially drier conditions. We remain cautious on the building materials sector but note this period's weather should provide much improved building conditions relative to pcp.”

• “ABC (Equal-weight A$1.80 PT) – Kwinana update was disappointing, AGM comments reflected a strong start to the year. Demand and price increases should be a positive contributor to margins albeit from a low base. However, we find the balance sheet leverage concerning and are concerned about the risk of further cost overrun.”

• “CSR (Equal-weight, A$5.50 PT) – CSR is well positioned to benefit from elevated backlogs through 1H24,although we think FY23 likely represented peak Building Products earnings.”

• “BLD (Underweight, A$3.00 PT) – We expect improved weather conditions, better pricing outcomes and some cost relief to provide a benefit for BLD. However, we believe this is already in consensus expectations and believe that this is well and truly represented in the current share price and elevated FY23e 39x P/E multiple.”

• “REH (Underweight, A$11.00 PT) - We think the headwinds on the Australian housing construction market coupled with management's stated view that activity in REH's key markets has peaked will put downward pressure on earnings growth.”

Scans