The Overnight Report: Growth Has Slowed

This story features COCHLEAR LIMITED, and other companies. For more info SHARE ANALYSIS: COH

By Greg Peel

The Dow closed up 51 points or 0.3% while the S&P rose 0.2% to 2095 as the Nasdaq fell 0.5%.

Disinflation

Cut in May and go away?

A 2% fall in the Aussie dollar over the past 24 hours to US$0.7596 would suggest the market believes the RBA has no choice but to cut next month following yesterday’s shock CPI data. The headline number fell 0.2% in the March quarter when economists had expected a 0.2% gain. The annual rate dropped to 1.3% when economists had expected it to hold steady at 1.7%.

It’s the first quarter of headline disinflation since December 2008.

The core CPI rose 0.2% when economists had forecast 0.5%. The annual core rate of 1.7%, down from 2.1% in December, is the lowest reading since 1997.

Economists are now split on whether the RBA will cut in May. The central bank has to balance a strong labour market, a solid housing market and a soaring rebound in commodity prices against disinflation and a too-high Aussie dollar. The board is carefully watching the jobs numbers for any sign of easing but there has been none to date. Analysts expect housing to soften in the second half and the commodity rebound to fade.

It appears to be a bit of a coin toss at this point.

The local stock market wasn’t taking any chances yesterday, if not backing a May cut at least expecting a cut to come sooner rather than later. The ASX200 initially rallied on the CPI release as for many sectors, a rate cut would be beneficial. But not for the banks of course. It was selling in the banks that turned a 61 point rally at the lunchtime peak into a 32 point loss at the close.

The 1.2% fall in the financials sector yesterday was the standout, both in percentage and in market cap clout. The industrials sector, in which many of Australia’s offshore earning companies lie, posted a small gain, as did consumer discretionary. Interestingly, the telcos were sold down 0.7% and utilities 0.1%, which seems opposite to what one might expect from a rate cut.

But realistically other sectors moves were fairly muted yesterday. For once the resource sectors did not take centre stage. It was all about the banks.

Tech Wreck

Facebook posted an earnings beat after the bell this morning and as I write, its shares are up 9%.

It is an against-the-trend result for this tech company when all of Microsoft, Google, Netflix, Apple and Twitter have posted weak results over the past couple of weeks. Twitter shares fell a solid 16% last night and Apple’s 6% fall took a good 40 points out of the Dow.

I mentioned yesterday that the US has two agencies monitoring weekly crude inventories and they can never seem to agree. On Tuesday night the API said a fall of a million barrels last week and last night the EIA said a rise of two million barrels. The market tends to go with the EIA, but the focus has now turned away from fluctuating weekly inventories toward the more important trend, being that of production reduction.

The EIA reported US production ticked down again last week to mark the seventh consecutive week of declines. That was enough to send the WTI price up 1.5%.

So last night Wall Street was selling tech and buying energy, which is evident in the split of movements among the major indices. The Dow was up 50 points, and could have been up 90 were it not for Apple, while the Nasdaq was down half a percent.

However all of the gain in the Dow and the S&P500 occurred subsequent to release of the Fed’s monetary policy statement at 2pm. Up until that point, the market had been poised at lower levels.

The critical sentence in last night’s statement was “growth has slowed”. Up to now the Fed has pointed to modest growth but in the meantime, economic data have not been too flash. Tonight sees the release of the first estimate of US March quarter GDP and that is expected to come in around 0.7%, down from 1.4% in December.

Those who were backing a June hate hike have now tempered their views. June is not out of the question, but the data would have to suddenly turn more positive in the interim. Many also suggest the Fed won’t hike just ahead of the Brexit vote, in fear of adding to potential market turmoil. But others find this foolish, as there are plenty of things going on all the time the Fed could use as an excuse for not changing policy, and rates would never move.

Either way, Wall Street suggested, by rallying toward the close, that June is now less likely, if it were ever likely in the first place. Attention now moves to the Bank of Japan’s policy meeting today, and the scary possibility of an even more negative Japanese cash rate.

Commodities

West Texas crude is up US67c at US$45.33/bbl and Brent is up US86c at US$47.20/bbl.

Base metal prices were a little weaker in London last night but the LME closed just as the Fed statement release is due, so tonight will tell the tale.

Iron ore is down another US$1.30 to US$62.80/t.

The US dollar index is down 0.1% at 94.40 and gold is relatively steady at US$1245.80/oz.

The Aussie, as noted, is now trading just under 76.

Today

The SPI Overnight closed up 52 points or 1.0%. Seems ambitious.

The RBNZ left its rate on hold this morning but hinted at a possible cut ahead. All eyes will be on the BoJ later today.

Tonight’s highlight will be the US GDP release.

On the local stock front, Cochlear ((COH)) and Computershare ((CPU)) will host investor days today while the quarterly production reports continue to roll in, with today featuring Independence Group ((IGO)). Mirvac Group ((MGR)) will provide a quarterly update.
 

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