The Overnight Report: Mixed Messages

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By Greg Peel

The Dow fell 41 points or 0.3% while the S&P added one point to 1844 and the Nasdaq rose 0.4%.

Be careful what you wish for. While many an Australian industry will have been rejoicing over a falling Aussie dollar, the lower Aussie is also pushing up prices of imported goods, and thus the CPI. Yesterday’s December quarter CPI reading for Australia showed 0.8% quarter on quarter growth, which was about twice consensus forecasts. A spike in fruit & veg prices and an unusual jump in travel and accommodation were partly responsible, and these should reverse. But as CBA’s economists suggest, there remains an underlying issue.

Imported inflation is rising on the falling Aussie, but there is not yet any offsetting drop in domestic inflation. The biggest influence on the CPI is the cost of services, and service sectors have been shedding jobs. This should lead to downward wage pressure and thus CPI relief, but it’s not. Offsetting any pressure, CBA notes, are increases in utility costs and other government charges including tobacco excise, childcare costs, and healthcare costs for an ageing population, among other things.

Annual headline inflation for 2013 came in at 2.7%, which met forecasts. But the RBA’s underlying inflation measure, excluding volatile elements such as food and energy, printed 2.6% against expectations of 2.3%, and the RBA’s own forecast of 2.25%. Rising house prices are dragging up some CPI prices, CBA notes, and the retail discount wars are beginning to ease. All of this adds up to a diminishing chance of any further rate cuts and a growing chance of a hike by year-end.

Now the RBA just has to hope the Aussie can continue to fall without help from monetary policy in order to support Australia’s required economic transition.

The CPI result was not well received by the market yesterday, although once again we saw late buying, particularly in the recently sold-down banks. Iron ore price jitters continue to weigh on the resources sector, despite BHP Billiton ((BHP)) posting an excellent quarterly result yesterday.

On Wall Street, the jitters are all about earnings results. Last night IBM (Dow) fell short on revenue and earnings guidance and its shares lost 3%. Intel rival Advanced Micro Devices lost 11% after guiding to reduced revenue. Are the old school tech stocks quietly becoming redundant? And on that note, upper end retailer Coach saw its shares fall 6% after announcing a fall in sales. There is a warning here for Australian retailers.

Of all the companies reporting so far in the US, the hardest hit have been the “bricks & mortar” retailers. The long established, well-known names. The reason? The growth of online shopping, which in the US now accounts for some 50% of purchases. Interestingly, shop-front retailers noticed a trend in December of weak sales right up until about three days before Christmas, when finally sales spiked. By then, of course, it’s too late to get a delivery from an online retailer.

The IBM result was fundamental in dragging down the Dow last night, whereas the broad market S&P remained steady. While last night’s session looked very much like Tuesday night’s, volatility eased and volumes remained low as heavy snow kept many players at home.

Then after the bell, the new face in online entertainment, Netflix, posted a result which sparked a 14% jump in its share price in the after-market. Online stalwart EBay also posted a strong result, and its shares are up 9%.

The US dollar index rose 0.1% to 81.17 last night, while gold slipped US$3.10 to US$1239.70/oz. On the strength of yesterday’s CPI release and diminishing expectations of another RBA rate cut, the Aussie is 0.5% higher at US$0.8856.

With the exception of nickel, which was steady, base metals all fell by 1% or less last night. It was less a case of selling and more a lack of buyers as trading interest dries up ahead of next week’s Chinese New year break.

We may see some respite in the local materials sector today, with spot iron ore up US30c to US$123.50/t.

The US natural gas price is on the rise given the extent of snow in the country, up over 6% last night. The big news in the energy sector last night was the start-up of the Gulf Coast Pipeline, which means oil is now flowing out of the WTI benchmark storage facility in Cushing Oklahoma and down to the Gulf Coast refineries in Texas. This pipeline is expected to ease the storage shortage at Cushing, and thus storage premiums, therefore closing the gap between West Texas and Brent. West Texas duly rose US$1.80 to US$96.77/bbl last night, but Brent rose US$1.35 to US$108.12/bbl.

The SPI Overnight is looking somewhat pessimistic this morning, closing down 22 points or 0.4%.

It’s flash day today across the globe, with estimates due for January manufacturing PMI numbers from China (HSBC), the eurozone and US. There is a raft of US economic data out tonight after a hiatus, while locally Santos ((STO)) will release its quarterly production report. Actual production will not be as relevant as the latest update in the progress of GLNG.
 

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