The Overnight Report: Inflation, And Lots Of It

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            [5] => ((ORI))
            [6] => ((XRO))
            [7] => ((AMC))
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            [9] => ((NEC))
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            [10] => REA
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This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies.
For more info SHARE ANALYSIS: NAB
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Inflation Scare I

Given Wall Street rolled over on Tuesday night following nine straight sessions of gains, it seemed out of place that the SPI futures would be up 20 points yesterday morning, yet by midday, the ASX200 was indeed up 26 points.

But that was the end of that. On the release of China’s inflation data, the index slid quickly to the close of down -10, marking the third soggy session in a row.

China’s producer price index jumped 13.5% year on year in October, up from 10.7% in September, to the highest level since data were first recorded in the 1990s. Perversely, the consumer price index rose only 1.5%, but that in itself was an ominous sign.

One of the issues driving today’s PPI inflation in the rest of the world was the practice of “just in time” inventory management, which meant holding only just enough stock to meet short term demand. Now the shelves are empty, and supply is constrained.

China, on the other hand, has always managed inventory on a longer term view – stockpiling when prices are cyclically low and drawing down when they are high. Because of this practice, China’s CPI inflation had barely moved in past months as suppliers drew down on inventories in the face of supply shortages. But October’s 1.5% increase suggests those inventories are now running out.

China does have its own problems. Bad weather has hit food supply (damaging snowstorms in the north as we speak), oil prices have surged, power cuts have impacted manufacturing and frequent covid lockdowns have disrupted freight movements. But China is seen as “the world’s factory”, hence a soaring PPI is putting pressure on global inflation.

Yet commodity prices have come off the boil, and iron ore fell below US$90/t yesterday. Materials was the worst performing sector (-1.5%), followed by energy (-1.1%) despite strong oil prices overnight (not last night), which has been put down to issues around proposed mergers.

Saving the day required a 0.7% gain for the banks, driven by an extraordinary 4.4% jump for National Bank ((NAB)). Suffice to say brokers were a lot more upbeat about NAB’s result release on Tuesday than the market was in sending the stock down -1.0% on the day.

Utilities also had a positive session (+0.7%) on a 1.4% gain for APA Group ((APA)), while industrials (+0.2%) was the only other sector to close in the green.

Chalice Mining ((CHN)) again topped the index leaders’ board with another 4.9% on top of Tuesday’s 28%, but miners dominated the losers’ board.

Wall Street has had more of a tumble overnight yet once again our futures are looking optimistic, down only -9 points this morning.

Inflation Scare II

The US CPI rose 0.9% in October when 0.6% was forecast to an annual rate of 6.2%, up from 5.4% in September. The core rate (excluding food and energy) rose 0.6% when 0.4% was forecast to an annual rate of 4.6%, up from 4.0%. Each hit a thirty-year peak.

More worrying in bond markets was an auction of US thirty-year bonds on the day which was described as “disastrous”. The thirty-year yield jumped 10 basis points and the ten-year yield 13 points to 1.55%.

This is in stark contrast to Tuesday’s response to the US PPI when the ten-year fell -7 basis points. Perhaps global bond investors were reacting to Biden’s spending spree, even as wound-back as it might become.

Wall Street had rolled quietly over on Tuesday night which was no surprise given a nine-day winning streak, and a lot of that was to do with Tesla alone. But it did set a mood for last night’s response, which saw the Nasdaq down over -2% at its low.

The Nasdaq versus bond rates correlation has not always played to script this year but last night it was easy for investors to quickly take profits in those stocks that have really been on the move in November, such as the FAAMGs (or is that MAAMGs?) and the likes of chip-makers Nvidia and AMD.

Tesla, funnily enough, closed slightly higher.

The impact of the mega-cap tech names can been seen in the split of a -1.7% fall for the Nasdaq to -0.7% for the Dow. Apple and Microsoft are the only two biggies in the Dow. They are all in the S&P500 however.

The fear is, of course, that rising inflation will ultimately force the Fed’s hand, and at this stage it is unknown just who will be in charge of the Fed next year. It was not until May this year when the US inflation numbers really began to take off, as delta disrupted the global economy. Hence it will not be until next May that year-on-year inflation readings begin to abate on a mathematical basis.

But the question in as to whether they can then fall all the way back towards the Fed’s 2% target or be stuck at an elevated rate.

Commodities

Evergrande again managed two last minute interest payments due yesterday with the suggestion being the billionaire founder is stumping up his own cash. Meanwhile another Chinese property developer, Fantasia, came out of a trading halt in Hong Kong and fell -52%.

Bit of a Mickey Mouse company.

Signs aren’t good for the iron ore price.

On Tuesday night’s announcement that Biden plans implement releases from the US Strategic Oil Reserve had the opposite effect on oil prices as the implication was US supplies must be tight. But last night, the EIA noted an inventory increase of one million barrels last week.

To top it off, Biden has upped the ante and suggested a coordinated reserve release with Europe/UK, where the energy crisis is even more acute.

A 0.9% surge in the US dollar index last night on the CPI numbers was not overall positive for commodity prices, except for gold (real yields in the US fell further with inflation surprising on the upside).

A rise in the dollar and a jump in bond yields are in isolation bad news for gold, but with real yields (corrected for inflation) deep in the negative, gold is responding as the inflation hedge.

The Aussie is down -0.6% at US$0.7335.

Today

The SPI Overnight closed down -9 points.

Australia’s job numbers are out today.

Japan’s PPI will be revealed.

Earnings results are due today from AusNet Services ((AST)), GrainCorp ((GNC)), Orica ((ORI)) and Xero ((XRO)).

Quite a burst of AGMs today, including those of Amcor ((AMC)), BHP Group ((BHP)), Nine Entertainment ((NEC)) and REA Group ((REA)).

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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